Page 12
— Office Properties Quarterly — March 2016
E
ven with record revenue of
$81 billion and annual growth
of 4.5 percent, AmLaw 100
firms still face considerable
economic challenges. Fee
compression and a weaker demand
for services are forcing law firms
to seek efficiencies. To offset these
challenges, a main area of focus is
on what is typically the second-big-
gest expense item on a firm’s finan-
cials – real estate.
Denver area law firms are push-
ing to become more efficient and
considering alternative workplace
solutions to reduce occupancy costs
and create environments that help
attract and retain top talent. This
objective is complicated by a real
estate market where there is declin-
ing vacancy and competition for the
most desirable office space.
Denver’s strong economy has
caused vacancies to fall and rents
in trophy buildings to rise 2½ times
faster than the overall market aver-
age. Maintaining
high profitabil-
ity in the face of
this environment
demands a sharp
focus and effec-
tive strategies to
counter record high
rental rates.
Following are
some of the biggest
challenges a firm
will face and some
opportunities to
address them.
Challenges
The market is tight.
Demand from
multiple industries continues to
absorb available office space. In the
past year, Liberty Global, WeWork,
Prologis, DaVita and Transamerica all
signed leases in the central business
district, representing absorption of
more than 700,000 square feet. Even
with the downturn in oil and gas,
we have seen tenant growth and
demand for new construction and
existing Class A space.
Owners are raising rates.
Denver
has experienced a flurry of capital
markets activity. A new wave of
institutional investors paid record
prices for properties. Many of these
investors followed their purchase
with capital improvements, includ-
ing lobby renovation, common
conference rooms, athletic facilities
and cyberlounges. The cost of these
activities required owners to raise
rents and sometimes reduce con-
cessions. These groups are bullish
on Denver, but seeking immediate
returns in the form of higher rent.
It’s more expensive to build out space.
Construction and labor expendi-
tures continue to rise, driving up the
cost of space build-outs. Space that
previously could be constructed for
$50 per sf is now closer to $75 per
sf with similar inflation occurring
everywhere along the spectrum. Also
firms are incorporating more collab-
orative space and technology, which
contributes to higher construction
costs.
Opportunities
New construction in the pipeline.
A
measure of relief greets tenants in
the form of new construction. With-
in the next 10 quarters, seven CBD
projects will add nearly 1.9 million sf
of space to the market. Since space
under construction is growing faster
than preleasing, this bodes well
both for law firms and other occupi-
ers. As supply increases, there will
be vacancy created throughout the
market. Unless tenants absorb space
faster than the projected deliveries,
there will be an increase in vacancy
and corresponding downward pres-
sure on rental rates.
Explore subleasing.
Sublease dispo-
sitions create opportunity for users.
Right now, energy-sector companies
are responsible for 52 percent of CBD
sublease space. Many of these sub-
leases contain high-end build-out,
long remaining lease terms and are
held by a master lessor that is still
creditworthy. Law firms typically use
similar space and can take advan-
tage of exceptional plug-and-play
options.
Consider alternative space solutions.
The legal industry is resistant to
dramatic change. However, more
firms are considering alternative
workplace solutions. This includes
progressive areas, incorporation of
open space, uniform office sizes and
greater use of technology through-
out. These options are especially
attractive as firms adjust to work
trends and the preferences of the
millennial generation. Many of these
solutions provide opportunities to
reduce the overall footprint and save
money on rent. But, more often, they
are an investment in the workplace
that contributes toward better work
efficiency and productivity.
Look outside the CBD.
With leasing
costs rising across core urban areas,
some law firms are considering relo-
cating outside of the CBD. When tak-
ing parking into consideration, there
is an opportunity to reduce occu-
pancy costs by 30 to 50 percent in
some suburban markets. There also
are a number of projects in the sub-
urbs that are incorporating elements
of “new urbanism” where individu-
als can live, work and play. This will
attract some CBD office tenants and
law firms trying to differentiate their
work environment.
s
Mike Rooks
Senior vice
president, Law
Firm Practice
Group, JLL, Denver
Leasing Market
Sublease dispositions
create opportunity
for users. Right
now, energy-sector
companies are
responsible for 52
percent of CBD
sublease space.
