According to Jones Lang LaSalle's Global Law Firm Perspectives 2012, strong economic growth in emerging markets is driving law firm office expansions across the Asia Pacific and Africa regions.
"Law firm real estate trends vividly illustrate current global economic polarization," explained Tom Carroll, Director - Corporate Research, Jones Lang LaSalle. "While firms focus their sights on high growth emerging markets in Asia and Africa, a tenant favorable market will continue in North America and much of Europe for quite some time."
The JLL report reveals the following key worldwide legal industry real estate trends:
A Return to growth via economic cross pollination - Larger multi-national firms are breaking their years of caution, as emerging market expansion returns to the agenda. Growth in emerging markets is driven by firms based in mature markets such as the U.S. and Western Europe, which want to be geographically aligned with the high growth economies in the Asia/Pacific, Middle East and Africa regions. For example, the growth of Western business interests in China has spurred law firm growth in Beijing, Shanghai and Hong Kong.
Corporate outsourcing driving demand - Multi-national corporations are outsourcing more legal work, driving demand for legal services typically provided from low-cost locations.
Law firm M&A shaping cities - Western law firms are partnering with local firms in emerging markets to serve expanding corporate clients, while cross-border M&A activity is also on the agenda. For example, in Morocco, Bird & Bird formed an alliance in Casablanca with El Amari & Associes, a legal services provider. Additionally, a cluster of M&A activity has occurred with Australian firms as U.S. and U.K. firms seek to expand their presence in the region.
Germany progressing - Emerging as an IP litigation center and continuing its economic leadership, German cities like Hamburg and Munich are welcoming new firms and office expansions.
New workplace strategies: lease expirations drive focus on productivity - In North America and Europe, firms are using less office space per attorney, deploying new workplace strategies designed to drive productivity and efficiency, often prompted by lease expirations.
Variable Rental Rate Cycles
"In global markets, law firm rents are influenced more by overall market conditions than by legal industry trends," explained Carroll. "Many markets are recovering economically, but still offer low rents because the market cycle has yet to drive rate increases." Incentives (or lack thereof) can vary from market-to-market as well.
For example, consider the following contrasts:
In Hong Kong, tenants are incentivized with an average of 2-3 months' free rent; in Tokyo, the number is 9-12 months free.
In Melbourne, where the Class A vacancy rate sits at a comparatively low 6 percent, average prime gross rents come in at A$517 per square meter. Yet in Sydney, with a higher 9.3 percent Class A vacancy rate, rents remain much higher than Melbourne's at A$925 per square meter, thanks in part to higher underlying property values.
"Rents are highly variable city-to-city, even within the same region or country," said Richard Proctor, Head of Central London Tenant Representation and Lead Director, EMEA Law Firm Practice, Jones Lang LaSalle. "Firms can find deals where rents are just beginning to rise, but remain close to the market bottom. It is critical for law firms to apply their forensic skills to their real estate portfolios to achieve an optimal outcome."
Tenant mix influences market trends
"'As go law firms, so goes the office market' is a sound guiding principal for North America," explains Elizabeth Cooper, Jones Lang LaSalle International Director and co-chair of the firm's law firm practice. "In contrast, anchor tenants in Europe, Asia and North Africa are more likely to be corporations, so law firm trends are not market-movers in quite the same way." In the U.S., law firms lease, on average, more than 15 percent of Class A office space in urbanized markets. In contrast, only two cities outside North America show law firms leasing more than 10 percent of Class A office space in the central business district."
The study, an annual barometer of law firm real estate trends around the world, characterizes a performance gap between advanced and emerging economies-and a renewed interest from large law firms in bridging that gap.