law firm perspective global 2012

Global 2012

Preparing for growth

Law Firm Perspective

Conditions remain highly variable within the real estate markets at the core of global law firm portfolios. A number of markets are seeing diminishing availability of high quality space options, while others present good opportunities for law firms to enhance their position.

As clouds remain on the macroeconomic horizon, and caution persists, law firms will need to adopt a forensic approach to the management of their real estate portfolio. This will ensure that assets are optimised and that firms outperform their direct competitors.

Opportunism will be evident in some real estate markets as law firms react to the changing environment. The traditional focus on prime locations and trophy buildings will remain, but it will also be accompanied by a new emphasis on workplace productivity and space efficiency.

With pressure on firms to improve the efficiency and utilisation of their office space, and a growing number of firms exploring more open plan workplaces with a less cellular structure, many law firms are finding that today’s demands are testing their existing buildings....

Law Firm Perspective • Global • 2012 3Jones Lang LaSalle

4 Law Firm Perspective • Global • 2012 Jones Lang LaSalle

Jones Lang LaSalle Law Firm Group

In the challenging economic environment we live in today, those who are tasked with management responsibility for global, national or regional law firms increasingly find themselves in the real estate business as a matter of sound firm management. The amount of time required to deal with portfolios in multiple offices in different cities and/or countries has increased, and has become ever more complex with critical events arising on a regular basis. These events are nearly always contextual; accordingly, they require a deep understanding of local market conditions for proper evaluation and action.

With over 1,000 offices in 70 countries worldwide, Jones Lang LaSalle has the scope and platform to have a robust firm understanding of those issues and events.

The Jones Lang LaSalle Law Firm Group concentrates on developing occupancy strategies, executing transactions and providing related

occupancy services to our law firm clients, nationally and globally. The team understands the importance of providing timely, accurate and relevant market information to our clients to enable them to efficiently manage their real estate in such a way as to generate maximum productivity while mitigating cost.

Accordingly, we are proud to present the latest version of our global market perspective. This annual report provides information on 30+ major markets across the Americas, Asia Pacific and Europe, the Middle East and Africa. The report details market trends for law firms around the globe, with the goal of assisting you and your firm in navigating the increasingly complex global marketplace.

We trust you will find this information useful and solicit your feedback if there are areas, that you would like to see expanded in the future.


In this report

Jones Lang LaSalle Law Firm Group 4

In this report 5

Global overview 6

Law firm market map 8

Global office property clock 9

Americas 10

Atlanta 11

Boston 12

Chicago 13

Dallas 14

Houston 15

Los Angeles 16

Miami 17

New York 18

Philadelphia 19

San Francisco 20

Washington, DC 21

Montréal 22

Toronto 23

Vancouver 24

Asia Pacific 25

Beijing 26

Hong Kong 27

Melbourne 28

Shanghai 29

Singapore 30

Sydney 31

Tokyo 32

EMEA 33

Amsterdam 34

Brussels 35

Dubai & Abu Dhabi 36

Germany 37

London City 39

Madrid 40

Milan 41

Moscow 42

Paris 43

Warsaw 44

Contacts 45


Law Firm Global Perspective

Law firms continue to face a tough global operating environment, with macroeconomic pressures and uncertainty bearing down on many of the business sectors they serve. After a period of international expansion and growth prior to the global financial crisis, the last four years have seen contraction and restructuring in the sector, with those firms previously dependent on financial services, particularly heavily impacted. The fall of Dewey & LeBoeuf is perhaps the most notable example of the financial pressure faced by international firms but many others have had to restructure, shed lawyers and pare back expansion plans in light of the more challenging operating environment.

Margin pressure and tougher operating conditions have had an explicit and pronounced impact on the real estate strategies of law firms. A more proactive management of real estate as a tool to both reduce operating costs and improve productivity is being realised by many managing partners in law firms in the US, UK and beyond.

This report assesses the real estate market conditions for law firms in over 30 mature and emerging locations around the globe - the opportunities and challenges vary widely. For those firms operating in multiple regions a clear understanding of this variance is becoming critical to achieving sustainable growth.

Clouds remain on the economic horizon After a promising start to 2012, prospects have become gloomier across the global economy. Once more it is problems in the developed world that are causing concern. Recent weeks have brought both greater optimism and new fears in the Eurozone. The ECB’s new plan for bond purchases and German support for additional ESM funds mean that the euro area at last has a credible strategy to ease market speculation. At the same time, the deteriorating situation in Spain is an uncomfortable reminder that economic concerns will not disappear overnight. Such macroeconomic uncertainty has had a corrosive effect on corporate sentiment, and confidence remains fragile.

The legacy of the financial crisis remains a yawning performance gap between advanced and emerging economies. Within a global expansion of 2.4% over the year, GDP growth in developed economies is projected to be 1.3% during 2012 as deleveraging continues. Prospects for emerging markets are slower than last year, but the decline leaves growth at an enviable 5% year-on-year. This underlines the fact that the emerging markets, particularly those in Asia, will

become increasingly critical growth drivers for all business sectors - including law firms.

Emerging market expansion returning to the agenda Firms are increasingly looking to Asia for growth opportunities, with a cluster of M&A activity between US, UK and established Australian firms as international firms seek to grow their presence in Asia. Africa is also emerging as a nascent destination for law firms seeking to partner with the growing number of corporate clients growing their businesses in the region. Morocco has been one particular area of focus for law firms over the past year with activity including Bird &Bird forming an association with El Amari & Associés, a legal services provider in Casablanca. Istanbul has been another market of focus, while many established firms in Moscow are seeing solid growth in business derived from domestic Russian clients.

Consolidation and lease events drive demand in mature markets Lease events remain a key driver of real estate activity in mature markets, in the absence of expansionary demand, acting as catalysts for change and analysis of real estate options and strategy. Lease regears, renewals and renegotiations have been seen widely in European markets, as firms have sought to take advantage of softer real estate market conditions and improve the terms of existing leases.

In markets such as the UK consolidation is being widely seen among mid-tier firms, with a number of firms linking up with regional and national contemporaries to benefit from greater economies of scale. Such moves have been driving a consistent level of activity in real estate markets as firms take the opportunity to review existing real estate and optimise portfolios for the shape of the new business.

Larger, established firms have also shown an appetite to leverage the reduction in operating costs that active management of the real estate portfolio can bring. Cost-saving and space-saving solutions are being widely explored with a some leading firms adopting the more open-plan, efficient work spaces that many other companies have adopted in other business sectors.

Building obsolescence an issue to watch With pressure on firms to improve the efficiency and utilisation of their office space, and a growing number of firms exploring more open plan workplaces with a less cellular structure, many law firms are


finding that today’s demands are testing their existing buildings. These pressures are compounded by an increasing focus on sustainability and CSR objectives – areas in which real estate can make a significant and tangible impact. Over the coming years, and across a range of global markets, building obsolescence will emerge a key issue forcing relocation and impacting real estate strategy.

Onshore, Nearshore, Offshore? Some law firms have also been assessing opportunities for locating business functions in lower cost nearshore or offshore locations as a further way of reducing real estate costs in prime head office locations. After magic circle firms such as Clifford Chance and Allen & Overy explored shared service centres in India and Belfast, in 2007 and 2011 respectively, other large firms have been considering such moves, although perhaps not at the pace initially anticipated by many industry observers.

There is also a growing trend to outsource low grade legal work with many corporates looking to hand over routine legal work to lower-cost suppliers. Some big corporations, including Rio Tinto, are outsourcing routine legal tasks, fuelling rapid growth at outsourced providers like Axiom, CPA Global and Pangea3, which was acquired by Thomson Reuters. The outsourcing of legal services is likely to continue apace impacting real estate requirements and strategy.

Real estate strategy to influence competitive position and firm performance The tough economic and operating conditions firms have faced since the global financial crisis of 2008 have forced many businesses to manage operating costs more actively. Law firms have clearly not been immune to that pressure. The value of real estate and effective portfolio management as a tool to manage costs and improve productivity, has seen it move up the agenda for many companies. This report highlights the challenges and opportunities facing law firms in the wide range of international markets many now operate. As we move into 2013, a considered and forensic approach to real estate strategy and decision making will become increasingly critical for law firms seeking to outperform their competitors and maximise their own performance.


Law firm market map

Atlanta

Chicago

London CityGermany

Warsaw

Mosow

MilanParis

Madrid

Dubai &Abu Dhabi

Brussels

Amsterdam

Singapore

TokyoShanghai

SydneyMelbourne

Hong Kong

Beijing

Vancouver Toronto Montreal

San Francisco Philadelphia

Miami

Los Angeles Dallas

Houston

BostonNew York

Washington DC


Frankfurt, Istanbul, MilanRome, Atlanta, Chicago, Miami

Brussels

Abu Dhabi

Rental GrowthSlowing

RentsFalling

Rental GrowthAccelerating

RentsBottoming Out

AmericasAsia PacificEMEA

MadridWashington DC

Dubai

Hong Kong

Singapore

New York

Dallas

Cologne, San Francisco

Houston

Beijing

Moscow, Warsaw, Berlin, Düsseldorf, Vancouver

Sydney

Hamburg, Toronto

Amsterdam

London, Melbourne

Paris CBDShanghai

Tokyo, Los AngelesBoston, Philadelphia

Munich, Montréal

Stuttgart

Global office property clock

The clock diagram illustrates where Jones Lang LaSalle estimates each prime office market is within its individual rental cycle as at end of the second quarter 2012.

Markets can move around the clock at different speeds and directions. The diagram is a convenient method of comparing the relative position of markets in their rental cycle. Their position is not necessarily representative of investment or development market prospects. Their

position refers to prime face rental values. Markets with a “step pattern” of rental growth do not tend to follow conventional cycles and are likely to move between the “hours” of 9 and 12 o’clock only, with 9 o’clock representing a jump in rental levels following a period of stability.


Americas

Jones Land LaSalle’s law firm index This index measures the environment for legal tenants within both a given market and comparatively among markets throughout the United States. Three component scores comprise the Jones Lang LaSalle law firm index. These three main categories quantify the quality of talent within a metro area and footprint of firms in the area (presence in the market), pricing and concessions favourability across cities and availability of space and leverage across markets. The index, which takes into account 30 different metrics and data points among the three major buckets, ranks markets that score highly as the most favourable for firms to occupy, relocate to and/or expand.

Major gateway markets tend to fall near the top of the list as a large catchment base and status as international gateways are key factors for firms deciding where to maintain offices. Overall trends factor into the index as well: most markets are seeing stagnant to declining levels of legal employment, both in overall volume and as a percentage of office-using and total employment, as well as continued downsizing to maximise efficiency.

At the same time, cities with significant premiums for Class A and Trophy space manage to outrank their peers, indicating that other factors are more at play in the minds of legal tenants for market

selection. Finally, overall office leverage for tenants has little bearing on the legal sector. High-scoring markets, for example, range from Washington, DC, which is moving further into tenant-favourable territory, and New York, the tightest market nationally in terms of vacancy.

Index score:

46.6

Tier 1 markets:• Law firm friendly• Strong presence of law

firms in metro area• Growing or stable legal

services employment• Legal services

comprises significant portion of office jobs

• Variety of block options and occupier-favourable leverage

Tier 2 markets:• Somewhat law firm

friendly• Concentration of law

firms, but not a key user of office space

• Stable or slightly declining legal services employment

• Legal services comprises an average portion of office jobs

• Block options exist, but not readily available

Tier 3 markets:• Not law firm friendly• Small legal footprint

compared to overall office market

• Declining legal services employment in most cases

• Legal services comprises a small fraction of office jobs

• Limited block availability and landlord-favourable leverage

Moderate presence

Moderate pricing

Small presence

Flexible pricing

Large presence

Limited pricing

Limited availabilityLarge availability Moderate availability


Index score:

52.9

Locational preference: Law firms in Atlanta are located in the Central Business District along the Peachtree corridor in A-plus tower space, especially in Midtown. Some firms opt for Downtown for easy access to the city’s courthouses and government agencies, while to the north, Buckhead’s financial district has also attracted some of Atlanta’s most visible firms.

Law firm activity has been relatively quiet in 2012 after a year in which some of the city’s biggest firms committed to relocating or renewing existing space. ‘Givebacks’ of space seem to have stabilised, with many firms keeping the same footprint or even adding small amounts of space. There are no ‘big game hunters’ in the market on par with what was seen in 2010 and 2011. Activity has been concentrated in the Buckhead and Midtown submarkets with a handful of renewals occurring Downtown. Conditions generally remain in favour of occupiers, and particularly for this highly sought-after tenant sector.

Nonetheless, large firms seeking premium high-floor Trophy space in Buckhead will find options limited. Demand is likely to funnel towards Midtown given the Class A vacancies that remain elevated there. Overall, law firm growth appears to be neutral in Atlanta.

Atlanta

Number of law firms occupying greater than 50,000 sq ft

Percent of Class A market occupied by law firms

Number of AmLaw 100 firms with offices locally

Percent of law firms comprising active tenants in the market

18

8.4%

22

10.0%

PRICING AND INCENTIVESOverallAverage Class A asking rent $25.10% annual change in Class A asking rent 2.2%Average % rent discount for negotiated rent 4.3%Average % rent premium for Trophy space 12.0%Average % rent discount for sublease space 24.0%Average annual escalation or bump 2.8%New/Renewal (assuming 10-year term)Class A tenant improvement allowance ($ price per sq ft) $54.00/$23.00Class A free rent (months) 12/4

ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Bryan Cave 90,000

Hunton & Williams 70,000

Burr & Forman 40,000

Top challenges for law firms• Particularly in Buckhead, there is limited availability of large contiguous blocks

of premium space in the Trophy towers, which will cause pricing conditions to tighten sooner than other urban submarkets.

• Space options are further limited for law firms unwilling to relocate into buildings already occupied by competing legal groups.

Top opportunities for law firms• Midtown, Atlanta’s traditional legal corridor, still has plenty of choices for top-tier

blocks of space, and thus landlords remain generally aggressive on concessions here.

• One of the most highly sought-after tenant sectors, law firms can capitalise on market conditions that overall, across the region, remain tenant-favourable as owners fight to lure tenants.

Alston & Bird 1201 West Peachtree Street 366,000 sq ftRelocation

Bondurant Mixson & Elmore 1201 West Peachtree Street 35,000 sq ft Renewal with expansion

Paul Hastings 1170 Peachtree Street 75,000 sq ft Relocation

2012 LAW FIRM COMPLETED TRANSACTIONS

OUTLOOK

2012 20142013 2015 2016 Tenant-favourable market Neutral market Landlord-favourable market

Moderate presence

Flexible pricing

Large availability


Top challenges for law firms• Firms in obsolete space face economic challenges due to a jump in rents for

quality, efficient footprints.• Premier large blocks of space are dwindling.

Top opportunities for law firms• Tenants still have a small window of opportunity to find real value in CBD low and

mid-rise space options.• Larger, creditworthy firms can partake in potential build-to-suit opportunities in the

developing Seaport District.

Locational preference: The city’s premier law firms occupy space at the most prestigious office towers in Boston’s Back Bay, Financial and Seaport Districts. Over the course of the past year, some law firms that have been traditionally located in the suburbs or Cambridge have chosen to move to the Seaport District.

It was a rather quiet year for the legal services industry in the Boston area. With limited large lease expirations and the volatility in the greater economy, rightsizing was still a trend for those firms transacting. While some law firms have cut headcount over the past few years, many are realising their current spaces are not as efficient as they could be. Gone are the days where large law libraries are needed. Law firms are now looking towards technology to provide greater workplace solutions and this is reducing space needs by close to 20.0 percent in many cases. With the high cost to fit-out space versus the amount landlords will contribute in tenant improvement allowances, law firms are faced with the economic challenge of obsolete work space or increased capital expenditures to make a change.

Boston still remains a core real estate market and a market that many national law firms continue to add a presence to. Comprising approximately 20.0 percent of the Class A market, along with just over 16.0 percent of active tenants in the market, law firms will still play a significant role in real estate activity this year and their decisions will continue to shape the future of ever-changing occupier trends.

Boston


ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Goodwin Procter 360,000

Goulston & Storrs 140,000

Riemer & Braunstein 60,000

Mintz Levin One Financial Center 245,000 sq ft Renewal

Pepper Hamilton 125 High Street 42,105 sq ft Renewal with expansion

Collora 100 High Street 18,698 sq ft Relocation


OUTLOOK






33

20.0%

29

16.3%Index score:

51.3 Moderate pricing

Large presence

Moderate availability


Top challenges for law firms• Large tenants are beginning to feel the effects of a tightening big block market,

resulting in a shift in leverage in favour of landlords.• The field of viable options for large users will continue to narrow in the coming

years as new development is four to five years away from delivery.

Top opportunities for law firms• Small- and mid-sized law firms still have an abundance of options in the market,

allowing them to more easily secure transactions that reduce operating costs.• An increasing number of law firms are considering aggressive space standards,

including universal office sizes for attorneys, which along with several other efficiency initiatives, has helped firms give back approximately 17.0 percent of space when they relocate locally.

Locational preference: The majority of Chicago’s law firm tenants are located in the West Loop and Central Loop submarkets. However, two new office towers in River North have attracted law firms north of the river.

For many firms, economic realities have fundamentally changed the legal industry in what seems to be a permanent way. Lower and more competitive fee structures have affected margins, causing firms to re-examine all expenses including real estate. In addition, firms with second-generation or older space are finding that it is no longer conducive to how they practise law. The firms that have made the commitment to build modern space are benefitting from the investment, but there are significant capital barriers that prevent others from doing the same.

The Chicago market remains largely tenant favourable; however indicators are showing early signs of the environment trending towards more neutral conditions. The exception to this is large users, including many law firms, which have dealt with a dearth of large block options for some time and are already feeling the impact of a leverage shift. Though several developers have plans to break ground in the near future, delivery of a new building is still several years away.

Continued economic uncertainty, as well as merger and acquisition activity, have left some decision-makers cautious when considering future space plans and how to accommodate the seemingly inevitable fluctuations in office needs. No matter the size of the firm, negotiating flexible lease terms will be paramount to law firms going forward.

Chicago


ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)McDermott 250,000

DLA Piper 225,000

SNR Denton 125,000

Foley 321 N Clark Street 173,000 sq ft Renewal with contraction

Latham & Watkins 330 N Wabash Avenue 137,000 sq ft Relocation

Perkins Coie 131 S Dearborn Street 104,000 sq ft Renewal with expansion


OUTLOOK






54

16.5%

36

20.0%Index score:


Large presence

Large availability


Top challenges for law firms• The overall market has shifted from strongly tenant-favourable to more neutral

conditions and net effective rents are rising, especially in Uptown.• Limited new construction over the next few years will force law firms with near-

term lease expirations to renew in place or consider second-generation space.• Financing constraints for new development will push construction levels below

historic norms.Top opportunities for law firms• An abundance of full-floor or smaller blocks of space remain available for

smaller firms.• One or two new construction projects may begin construction in the intermediate

term, which could deliver in the next 24 to 30 months.• The increase in institutional ownership in the CBD makes existing properties

more attractive to law firms.

Locational preference: Approximately 80.0 percent of law firms are located in the Dallas CBD and Uptown submarkets, with some additional firms located in Preston Center, N Central Expressway and Far North Dallas.

In the next few years there will a great deal of churn in the law firm space as many firms have leases expiring in the 2013 to 2016 time frame. Typically firms are located in second-generation Class A buildings in the Dallas CBD and will need to make the decision to renew at the older, less desirable locations or move to newer, more expensive locations (i.e. Uptown). This next wave of lease expirations in 2013 already has several of these firms actively pursuing spaces in the market.

There is a great deal of churn anticipated over the next few years with law firms in older spaces more likely to move (buildings like Lincoln Plaza, Trammell Crow Center, 2100 Ross, and Fountain Place are expected to benefit), while law firms in more modern space are more likely to renew.

New construction in Uptown is an attractive draw, but the economics of Class A space in the CBD will win out in many cases, where rents are 30.0 to 40.0 percent lower.

Dallas


ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Locke Lord 180,000

Jones Day 140,000

Jackson Walker 120,000

Baron & Budd 3102 Oak Lawn Avenue 47,030 sq ft Renewal with expansion

Hallett & Perrin 1445 Ross Avenue 23,427 sq ft Relocation

Jackson Lewis 500 North Akard Street 19,647 sq ft Relocation


OUTLOOK






23

14.0%

19

5.0%Index score:

53.0 Flexible pricing

Large presence

Large availability


Top challenges for law firms• Large blocks of space available in choice submarkets (CBD, Greenway Plaza)

will continue to decline as no new developments are in the pipeline.• Landlords will continue to raise asking rents and scale back concession

packages in prime Class A buildings as Houston’s economy continues to grow.• In order to secure the most favourable rates on available space, law firms must

be willing to enter the market sooner despite future-term lease expirations.

Top opportunities for law firms• Over the next 18 to 36 months, new Class A buildings are coming online in the

Galleria/West Loop and West Houston submarkets, offering firms the chance to move into higher-quality spaces with premier amenities.

• Energy-focused law firms will continue to see growth as a result of the booming energy market in Houston and in South Texas (Eagle Ford Shale Play).

Locational preference: The majority of law firms are located in the CBD, Galleria and Greenway Plaza submarkets. Firms tend to prefer Trophy or Class A space in close proximity to energy clients, as well as those buildings near the CBD courthouse with marketable and well-known addresses. Due to the current scarcity of large blocks of available space in the preferred submarkets, as well as the recent shift of new construction and clients to the West Houston submarkets, law firms will soon be forced to expand their search for space towards these suburban areas.

Houston’s status as a global energy leader has enabled a large influx of law firms to locate in Houston and the CBD. Centrally located near the Houston City Hall and city and county court houses, the CBD attracts and retains boutique law firms specialising in commercial and global energy practice litigation. The CBD remains Houston’s predominant location for law firm tenants, with over 4.4 million square feet being occupied by notable tenants such as Vinson & Elkins, Fulbright & Jaworski and Baker Botts, among many others.

Law firm tenants in the market have remained active despite the recent economic slowdown. While we have recently seen several notable lease transactions, such as Morgan Lewis’ renewal of nearly 90,000 square feet at the iconic Wells Fargo Plaza (1000 Louisiana), the current trend among Houston law firms is to downsize and give back space. For example, Locke Lord recently gave back four floors of space totaling 110,000 square feet at Chase Tower (600 Travis). Furthermore, it has been noted that Locke Lord temporarily ceased the subsidisation of its associates’ parking; all a move to cut costs in light of the national economic downturn.

Law firm tenants continue to proceed in a cautiously optimistic manner, and cost control seems to be the key objective of many firms in the area. However, we expect activity to increase in the coming years as many law firm leases are set to expire over the next 24 to 36 months. This will result in an increased competition for quality, second-generation space. While construction costs for commercial law firm build-outs are increasing, they have held fairly steady over the past 12 months. For renovations of second-generation office space, hard construction costs for upgraded law firm projects range from $40 per square foot on the low end to $80 per square foot on the higher end.

Houston


ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Susman Godfrey 75,000

Coats Rose 60,000

BakerHostetler 50,000

Morgan Lewis 1000 Louisiana Street 89,518 sq ft Renewal

Crain Caton & James 1401 McKinney Street 29,558 sq ft Renewal

Strasburger Price 909 Fannin Street 28,226 sq ft Expansion


OUTLOOK






28

15.0%

44

2.0%Index score:


Large presence

Large availability


Top challenges for law firms• Potential disposition and sales of the MPG Portfolio to a local competitor could

instill more market discipline and cause rents to increase.• Low vacancy in Santa Monica could compel landlords to increase rents further.• Cash-strapped owners remain unable to offer high tenant improvement

allowances.

Top opportunities for law firms• A large number of contiguous blocks of space available in Downtown and

Century City will provide firms with ongoing leverage.• Los Angeles continues to offer law firms great value in terms of rent, relative to

other gateway markets.• Now is a great opportunity to trade-up to Trophy assets or amenity-rich locations.

Locational preference: A majority of CBD law firms are located on Bunker Hill and the Financial District. A large number of Westside legal tenants tend to be concentrated in Century City and in the Water Garden in Santa Monica. Downtown’s financial core could attract well-entrenched Bunker Hill law firms as the area continues to benefit from retail-led revitalisation. The Westside market could see a shift away from pricier submarkets such as Beverly Hills and Santa Monica, to Century City, which currently has a higher vacancy.

Los Angeles-based law firm tenants are once again thinking in terms of recruitment and seeking locations that appeal to their employee base. Law firm Morrison Forester has relocated from Bunker Hill to the amenity-rich Financial District and we anticipate other large downtown relocations in the next couple of quarters. We also expect to see more long-term leases signed as companies gain increasing confidence in the regional economic outlook.

On the Westside, law firms choosing to locate in Santa Monica, which has the lowest vacancy in the region, will face strong competition for Class A space. Entertainment, technology and media companies have driven recent growth. On the other hand, Century City will continue to offer prime location opportunities for those law firms wishing to trade up.

The Downtown market could see a dramatic change in ownership with one of its largest owners placing its entire 7.3 million-square-foot portfolio, comprised of 37.0 percent of the downtown Class A market, on the market for sale. Should an existing large downtown landlord acquire the entire portfolio, the new ownership would stand to gain substantial leverage, and we could see even greater pricing discipline exerted in the market. Consequently, the window of opportunity to lock in favourable rates could be more limited.

Los Angeles


ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Sedgwick 80,000

Pepper Hamilton 25,000

Polsinelli Shughart 25,000

Lewis Brisbois Bisgaard & Smith 221 N Figueroa Street 160,415 sq ft Renewal

Alston & Bird 333 S Hope Street 80,000 sq ft Renewal

Morrison Foerster 707 Wilshire Boulevard 77,300 sq ft Relocation


OUTLOOK






80

19.4%

51

23.0%Index score:


Large presence

Large availability


Top challenges for law firms• ‘View space’ for law firms remains limited even in some of the new developments

that delivered vacant during the last cycle.• Space properly sized to accommodate new criteria.• Efficient use of space due to new technology (no more big libraries, mailrooms).

Top opportunities for law firms• The lease environment remains overall favourable, if not excellent, for

premium space.• Net rents continue to be driven down due to oversupply via new development in

the last cycle.• New buildings and upgrades from existing product offer high-end finishes,

increased amenities and efficiencies.

Locational preference: Miami’s CBD is comprised of two submarkets, Brickell and Downtown. 71.0 percent of Class A law firm users occupy space within the Downtown sector of the urban core. Up to 600,000 square feet of demand is expected from this industry sector. Of this, nearly 344,000 square feet are actively touring market wide – 85.0 percent of which are CBD requirements. Look to another 249,000 square feet not yet touring, but up for renewal – all of which will remain in the CBD.

Despite the dissolutions and defections among law partners and the bleak job market for new law school graduates, Miami’s legal tenants have still managed to renew, expand and open new offices. Market-wide, Trophy product has captured over 80.0 percent of all law firm transactions, with the bulk of occupancy on a square footage basis occurring in Downtown. On the ‘mega’ tour activity front (requirements at or above the 40,000-square-foot benchmark) over one-quarter or 545,000 square feet of all Miami’s tours fell within this range. While several industry sectors made up these tours, the largest in order of size were law firms.

One of the first noted transactions to be publicly announced going into third quarter tracks along the same trend – demand for prime spaces within the CBD and some of its largest occupiers emanating from the legal industry. During the first quarter, Hogan Lovells (AmLaw’s sixth-ranked firm) signed a short-term lease for 21,000 square feet in Downtown at Florida’s largest Trophy asset (Southeast Financial Center). By third quarter, recent press coverage indicated a long-term commitment in the CBD’s newest Trophy tower, Brickell World Plaza. The building, located in the Brickell sector, will see Hogan occupy 40,000 square feet.

Miami

PRICING AND INCENTIVESOverallAverage Class A asking rent $40.77% annual change in Class A asking rent -2.3%Average % rent discount for negotiated rent 4.0%Average % rent premium for Trophy space 10.0%Average % rent discount for sublease space 11.5%Average annual escalation or bump 3.0%New/Renewal (assuming 10-year term)Class A tenant improvement allowance ($ price per sq ft) $40.00/$35.00Class A free rent (months) 7/7

ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Holland & Knight 100,000

Gunster 25,000

The Ferraro Law Firm 20,000

Hogan Lovells 600 Brickell Avenue 40,000 sq ft Relocation

Diaz Reus 100 S.E. Second Street 14,500 sq ft Renewal and expansion

Stroock 200 S. Biscayne Boulevard 14,500 sq ft Renewal


OUTLOOK






6

17.0%

20

41.7%Index score:


Large presence



Top challenges for law firms• Legal services has been one of the slowest industries to recover from the downturn,

with employment still down 8.5 percent in Manhattan since the 2008 peak.• Rising Trophy rents, coupled with lower profits, are forcing firms, which have

traditionally occupied the top end of the market, to consider more cost- effective options.

Top opportunities for law firms• By becoming more efficient, law firms that have relocated have been able to

shed approximately 15 percent of their footprint.• Even with decreased vacancy rates, viable options are available, particularly in

Midtown West and Downtown, which have a significant amount of new construction.

• With the growth of the new media and technology industry, there is opportunity for firms that specialise in those sectors.

Locational preference: The majority of law firms in New York are located in the Midtown and Downtown submarkets. Specifically, firms gravitate to newer Class A and Trophy buildings within the Financial District, Columbus Circle, Grand Central, Plaza District and Times Square. There is a migration of firms moving to the west side of Midtown and Downtown. With large blocks of Class A and Trophy space becoming available Downtown at a significant discount to Midtown rents, Downtown provides an attractive alternative for firms to relocate. Many top firms, however, chose to remain in the Plaza District.

Despite a handful of high-profile transactions this year, total occupancy in the legal services industry has been receding in Manhattan as many firms contract, both in head count and square feet per employee. Year-to-date, law firm leasing activity represents just 5.3 percent of total, compared to 17.0 percent in 2007.

Top New York law firms are facing flat to declining profits, as a result of a contraction in overall business volume (in specific, dramatically reduced transaction activity on Wall Street), increased competition, outsourcing of low margin work and insourcing, with companies increasingly relying on in-house legal staff. Dewey & LeBoeuf—in business for more than a century-filed for bankruptcy in early 2012 and vacated 475,000 square feet at 1301 Avenue of the Americas. Chadbourne & Parke recently signed a direct lease to take 200,000 square feet of Dewey’s space. Chadbourne will fully rebuild Dewey’s space to adopt new law firm standards and efficiencies.

Many legal firms are opting to renew, often several years in advance, to lock-in current terms and avoid the upfront costs of relocation and existing asset write-offs. Kaye Scholer, however, signed a letter of intent to take 260,000 square feet in Boston Properties’ new development at 250 West 55th Street in what may prove to be the largest transaction of 2012. A bright spot in the industry has been the modest rebound in M&A activity and growth in the new media and technology industries, which provides opportunities for firms that specialise in those fields.

New York


ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)White & Case 400,000

Kaye Scholer 250,000

Mayer Brown 250,000

Chadbourne & Parke 1301 Avenue of the Americas 200,000 sq ft Relocation

Wilson Sonsini Goodrich & Rosati 1301 Avenue of the Americas 48,980 sq ft Renewal

Akerman 666 Fifth Avenue 48,166 sq ft Relocation


OUTLOOK






118

11.7%

83

16.9%Index score:


Large presence

Large availability


Top challenges for law firms• Strong Trophy landlord leverage is driving increased rental rates.• With no new office development, large law firms will be faced with limited

contiguous blocks at high-quality assets.• Landlords closely monitoring small- to mid-sized law firm credit.

Top opportunities for law firms• Market Street West’s occupancy-constrained, Class A properties are willing to do

aggressive deals.• Trophy tenant consolidations have yielded new availabilities for small- to mid-

sized users.• Class A availabilities are very conducive for half- to full-floor law firms.

Locational preference: The majority of Philadelphia’s law firms are located in the CBD’s Market Street West submarket. This location provides easy access to abundant amenities and immediate proximity to the city’s concentration of professional services companies. Despite the declined availability of large contiguous blocks and rental rate increases in Market Street West, the submarket will remain the core location for law firms.

Law firm activity spiked in 2012 as Market Street West’s largest law firms completed transactions. In light of tightened Trophy conditions, large tenants have come to market two to three years ahead of expiration, finalising leasing decisions as far out as 2015. As year-end 2011 approached, Reed Smith’s market-moving 115,000-square-foot lease at Three Logan Square created a window of opportunity for Cozen O’Connor to upgrade its space. The Philadelphia-based firm recently signed a long-term lease to occupy Reed’s One Liberty vacated space upon its relocation. Morgan Lewis and Ballard Spahr also finalised leasing decisions this year.

While Morgan Lewis renewed in place, many of Philadelphia’s CBD law firms are rightsizing existing footprints; by 13.0 percent on average. Ballard Spahr will shed two floors of space at 1735 Market Street, and Reed Smith is decreasing its footprint by more than 25.0 percent.

Accelerated law firm transaction volumes drove a year-on-year decline in sector requirements by nearly 50.0 percent. Now, with 440,000 square feet of active firms in the market, the majority is comprised of small firms, less than 10,000 square feet requirements. Finalised relocation decisions have decreased high-quality, contiguous blocks of available space, pushing large requirements-focused on Trophy-to consider new proposed developments. Simultaneously, consolidations are creating availabilities at Trophy assets, bringing opportunity to small- and mid-sized firms.

Philadelphia


ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Pepper Hamilton 220,000

Drinker Biddle 175,000

Harkins Cunningham 9,000

Morgan Lewis 1701 Market Street 289,432 sq ft Renewal

Cozen O’Connor 1650 Market Street 200,000 sq ft Relocation

Ballard Spahr 1735 Market Street 179,000 sq ft Renewal with contraction


OUTLOOK






23

20.3%

18

26.1%Index score:


Large presence



Top challenges for law firms• Large block availability is dwindling significantly with new supply still 6 to 18 months

away from delivery.• Law firms in the market for large blocks are facing stiff competition from technology

companies, which is the fastest growing industry in the market.• Rents have increased significantly and continue to rise, placing pressure on tenants to

either act now or make shorter-term deals to holdover.Top opportunities for law firms• Many landlords have begun to build out ‘open’ workspace to appeal to tech tenants;

these spaces could work for law firms seeking efficiencies. • New developments in the South Financial District will open up opportunities for tenants

to relocate from the North Financial District into newer, more efficient space.• Popularity of the South Financial District and South of Market among tech firms has left

more large blocks in the North Financial District, where many law firms occupy space.

Locational preference:The majority of law firms in San Francisco are located in the North and South Financial Districts where premier Class A properties are concentrated and where law firms can be in close proximity to other businesses and clients. The centre of San Francisco’s business district has shifted in recent years towards the South Financial District as companies look to take advantage of newer office buildings and closer proximity to multiple forms of public transportation. Additionally, redevelopment of the Transbay Terminal and the future extension of the Caltrain rail line are drawing more companies to this submarket.

Over the past four years, the legal industry in San Francisco has experienced a significant decline in occupied space as law firms have been among some of the most adversely affected companies during the recession. As a result, many have shed hundreds of thousands of square feet in an effort to reduce costs and streamline business. Although many large deals have been signed in recent years, most involved downsizing or renewing in place - entering the market simply because of impending lease expirations.

Today, however, there are a handful of firms in the market for expansion space, but rightsizing and creating a more efficient workplace continue to dominate leasing activity in this industry.

San Francisco


ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Coblentz Patch Duffy & West 85,000

Gordon & Rees 80,000

Fenwick & West 60,000

Lewis Brisbois Bisgaard & Smith 333 Bush Street 52,000 sq ft Relocation with contraction

Jackson Lewis 50 California Street 18,878 sq ft Relocation

Mintz Levin 44 Montgomery Street 15,666 sq ft New deal to the market


OUTLOOK






16

5.2%

41

8.6%Index score:

38.2Large presence

Limited pricing



Top challenges for law firms• A sharp slowdown in new speculative construction is on the horizon. • quality blocks of space are dwindling and new buildings delivering in 2013 are

already 61.7 percent preleased.• Potential for rent increases exists once the current oversupply in the market

is reduced.

Top opportunities for law firms• Concession packages have increased to all-time highs, and generous free-rent

and tenant improvement allowances have driven net effective rents sharply lower. • Dissolutions and sublease dispositions have created additional space options

for tenants.• Competition in the marketplace is limited by a finite number of near-term

lease expirations.

Locational preference: The majority of law firms are located in the CBD, East End and Capitol Hill submarkets. New developments with efficient floorplates have been favoured by most law firms recently. Due to an overall lack of large blocks of space available in new, modern Trophy and Class A+ buildings in the West End, CBD and East End, law firms are looking to new and proposed developments in the East End and the emerging Mount Vernon Triangle micromarket.

The traditional catalysts of Washington, DC, law firm demand – regulatory activity and lobbying – eroded in 2012 amid Congressional gridlock and the pending election cycle. Additionally, the dissolution of another key law firm tenant, Dewey & LeBoeuf, resulted in 125,000 square feet of space being released back to the market at 1101 New York Avenue NW. Dewey’s implosion dealt another blow to the East End, which had been impacted earlier by Howrey’s 300,000-square-foot collapse at the Warner Building and several other downsizings and relocations. McDermott Will is set to move in December 2012, vacating approximately 235,000 square feet at 600 13th Street NW as part of its move into approximately 160,000 square feet at 500 N. Capitol Street NW. The continued push by tenants across the market to maximise space efficiency, has depressed space demand by 24.7 percent market-wide, and the lack of near-term lease expirations has presented minimal competition to tenants in the market.

Despite the general malaise seen throughout most of the market, leasing activity gained momentum in the summer of 2012. Landlords competed aggressively for tenants and began offering unprecedented levels of concessions. Vornado assumed Cooley’s remaining lease liability at 777 6th Street NW to help backfill Howrey’s space at the Warner, and several of the city’s largest law firms – including Covington, Arnold & Porter and Pillsbury – signed letters of intent at new developments.

Given the overall state of the market, now is an optimal time to act for many tenants, as concession packages remain elevated, yet quality space options are quickly being removed from the market. The pullback in new construction should gradually create a landlord-favourable market by 2015.

Washington, DC

PRICING AND INCENTIVESOverallAverage Class A asking rent $55.30% annual change in Class A asking rent -2.1%Average % rent discount for negotiated rent -6.5%Average % rent premium for Trophy space 30.8%Average % rent discount for Sublease space -19.6%Average annual escalation or bump 2.5%New/Renewal (assuming 10-year term)Class A tenant improvement allowance ($ price per sq ft) $90.00/$55.00Class A free rent (months) 10/5

ACTIVE LAW FIRM REqUIREMENTS IN THE MARKET (sq ft)Sidley 250,000

Nixon Peabody 75,000

Willkie 75,000

Covington & Burling 800 & 850 10th Street NW 415,000 sq ft Relocation

Gibson Dunn 1050 Connecticut Avenue NW 204,705 sq ft Renewal

McKenna Long & Aldridge 1900 K Street NW 172,701 sq ft Renewal


OUTLOOK






91

44.6%

95

47.4%Index score:


Large presence

Large availability


Locational preference: The majority of law frms are located in Downtown Montréal. Primarily in the Downtown Core, with some in the Downtown South node for corporate law firms and in Old Montréal for litigating lawyers, due to its proximity to the Court House and Court of Appeal. Other firms have opted to locate themselves in the Suburb of Laval, which has a large courthouse and a significant cluster of Class A buildings.

Top-tier law firms in Montréal are located primarilly in the Downtown Core followed by the Downtown South node, with Old Montréal having a heavy concentration of smaller litigating law firms. While 2011 proved to be a slow year for law firms, 2012 saw a spike in activity, characterised by renewals and relocations. Unlike other occupiers, law firms remain less likely to switch to open office spaces, partially due to the requiremnt for confidentiality. As a result, consolidations and reductions in space have tended to be minimal. With the mergers and acquisitions and insolvency practices continuing to grow organically, most law firms are either maintaining their office footprint or growing.

Law firms, are currently facing the same dilemma as other tenants in Downtown Montréal. There continues to be a lack of large blocks of available space coupled with a low vacancy rate, giving tenants little leverage in negotiations with landlords. As a result, most law firms are choosing to renew in place, rather than relocate for little or no rent reduction. Law firms with requirements larger than 50,000 sq ft will have to look at the new construction market for opportunities however; this will not come without a premium in rent, as most new buildings will be LEED certified.

Montréal

Percent of Class A CBD market occupied by law firms

Number of law firms occupying > 100,000 SF in the market

7.3% 6

PRICING AND INCENTIVESOverall

Average Class A CBD asking rent $21.32

% annual change in Class A CBD asking rent 4.9%

Average % CBD rent discount for negotiated rent 15.0%

Top 3 challenges for law firms1. The lack of direct available large blocks of contiguous space in Downtown Montréal will make it dificult for law firms looking to relocate. quality blocks of space are

dwindling and new buildings to be delivered in 2013 are already 61.7 percent preleased.2. Rental rates continue to escalate, especially in the Trophy segment of the market, making relocations unattractive.3. With Downtown Class A vacancy at 5.4 percent, there is little ‘swing space’ available for tenants looking to expand.

Top 3 opportunities for law firms1. With two new towers confirmed, law firms with expirations after 2014 can look to the new construction market for space requirements2. The increase in sublease space on the market has created opportunities for tenants with requirements under 50,000 sq ft willing to sublease.3. As office buildings currentlly in preleasing begin construction, law firms will find themselves with LEED certified space options.

Speigel Sohmer 1010 Ste-Catherine St. W. 26,963 sq ft Relocation

Miller Thomson 1000 de la Gauchetière St. W. 48,006 sq ft Relocation

Heenan Blaikie 1250 Rene-Levesque 130,571 sq ft Relocation

RECENT LAW FIRM COMPLETED TRANSACTIONS

OUTLOOK



Locational preference: The majority of law firms are located in the CBD, specifically, in the financial core, East, West and North ends. Firms gravitate to buildings within the financial core where major clients are located; Union station provides the best transportation accessibility in the province, and there is a sense of prestige being on or near Bay street.

Toronto’s downtown market continues to be recognised as one of the most significant legal markets in the world. In recent years we have seen an influx of large multinational law firms to the city, particularly in the financial core. The past few years have also seen a trend in industry consolidation between foreign and domestic firms such as UK-based Norton Rose and Montréal-based national law firm Ogilvy Renault. In addition, London-based Clyde & Co., has merged with insurance-law boutique Nicholl Paskell-Mede. As of mid-September 2012 at least three major lease renewals, in aggregate over 450,000 sq ft, had closed. Several law firms are getting close to their lease expiries, which will spark relocation and renewal activity over the next two or three years. The continued tightening of the downtown market will have many law firms opting to renew early to lock-in current cost structures. Class A vacancy is expected to linger around the 4 percent mark at the end of 2013 with few options for tenants seeking space greater than 50,000 sq ft. Although the downtown core is currently experiencing its largest building boom since the early 1990s only one confirmed new development is located in the financial core, where the majority of Toronto’s law firms are located. The new developments will certainly have landlords reconsidering ‘asking rates’ as tenants are looking at more options to renew, expand, or relocate on favourable terms. However, it is unlikely that we will see a migration of law firms from the financial core to other parts of the downtown core as law firms are willing to pay a premium to be close to the courts, clients, amenities and public transportation.

Toronto


Number of Law firms occupying over 100,000 sq ft

11.74% 18




Average % rent discount for negotiated rent 15.0%

Top 3 challenges for law firms1. Tightening space availability, along with new developments coming to market, will have law firms looking to act. 2. While the staff to attorney ratio has doubled from 1:2 to 2:4, legal firms are also looking for ways to reduce their footprint per employee.3. Attraction and retention of talent.

Top 3 opportunities for law firms1. 2014 will be the start of new space being introduced and many firms may take advantage of leasing opportunities. 2. Large blocks of space will become available as several large leases will expire in the next 4 - 6 quarters.3. Law firms willing to move south of the financial core have plenty of opportunity in the upcoming years.

Fogler, Rubinoff 77 King Street West 91,984 sq ft New lease

Bennett Jones 100 King Street West 165,000 sq ft Renewal

Osler 100 King Street West 200,000 sq ft Renewal


OUTLOOK



Locational preference: The 27 largest law firms in Greater Vancouver are located in the Central Business District. Of the 12 firms that occupy over 50,000 square feet, the majority are concentrated within four-block stretches of two streets: five of the largest firms are located on West Georgia Street, four occupy buildings on Burrard Street; and a total of five can be found within a block of the Burrard and West Georgia intersection.

With seven large firms currently in the market, and another five having recently completed deals, law firms have been very active over the last 12 months. Six confirmed new office towers, and several other proposed developments in preleasing or other stages of the development process, have been the catalyst for the sector’s increased market activity compared to the year prior. Several large firms feel that the ‘window of opportunity’ to explore relocation and early renewal options is now.

Downtown tenants have had little to no leverage in recent years due to the combination of low class A vacancy and minimal development activity. For firms exploring early renewal options, the impending new supply offers the potential to mitigate future rental rate increases by committing to second-generation space while large blocks remain available for preleasing in new buildings. In contrast, two firms have already committed to new developments and others are considering preleasing space in order to take advantage of the opportunity for a cultural change, increasing efficiencies and the enjoyment of the newest building technologies.

Vancouver

Percent of Class A CBD market occupied by law firms

Number of law firms occupying >100,000 sq ft in the market

13.2% 1




Average % rent discount for negotiated rent 13.0%

Top 3 challenges for law firms1. There are very few expansion and relocation options over 10,000 square feet in existing CBD buildings due to a very competitve leasing market and minimal new

inventory over the last 10 years.2. Law firms with lease expiries prior to q3 2014 will face significant logistical challenges if they wish to consider relocating to a new development, due to the length of

fixturing period required for law firms.3. An abundance of firms currently in the market, combined with limited space options, will likely result in competition for space among the legal community. Top 3 opportunities for law firms1. New construction is being leveraged to negotiate renewals years in advance of lease expiries, a trend that we expect to continue in a market that has been characterised

by rising rental rates and scarce large block options due to a lack of new supply.2. Continued preleasing activity in new developments will create additional relocation options in the form of Class A backfill opportunities.3. Firms with lease expiries in 2016 or later will be able to negotiate their next deal with the benefit of at least a 12% increase in class A inventory due to the timing of the first

wave of development.

Harper Grey 650 West Georgia Street 37,000 sq ft Renewal

Clark Wilson 885 West Georgia Street 43,000 sq ft Renewal

Bull Housser 1055 West Georgia Street 67,000 sq ft Relocation


OUTLOOK



Asia Pacific


Locational preference: Most foreign law firms are located in the CBD, particularly in China Central Place, China World, Kerry Centre and Yintai. Local firms tend to be more dispersed, with offices in the CBD and Dongcheng District as well as Finance Street.

Beijing has seen it all; from the unfortunate demise of Dewey & LeBoeuf to Mallesons merging with King & Wood, 2012 has had its share of activity. In between these two events there have been several leasing transactions, including new entrants to the market such as Sheppard Mullin and Proskauer Rose. New leasings from law firms include 1,700 gross sq m taken up in China World Trade 3 by Allen & Overy, 336 sq m in China World Trade Center 2 by Ince & Co, and 500 sq m in China World Trade Tower 1 by Sheppard Mullin. The Taiwanese law firm Lee & Li renewed their lease for 1300 sq m in Beijing Oriental Plaza and Morgan Lewis signed a renewal for 900 sq m in the Kerry Center.

Factors such as record-high rents, increasingly limited vacant space in the market, reduced growth forecasts for the Chinese economy and uncertainty in the global economy, have all led to reduced demand in the second quarter of 2012. However, net absorption remained positive at 146,000 sq m in the first half of 2012. As most of the well-established buildings in the city are almost fully occupied, the majority of the take-up has occurred in recently completed projects.

Just one new project, a building in Finance Street, is expected to be launched in the remainder of 2012, which will add just 22,900 sq m to the market. It is likely, therefore, that as vacant space becomes increasingly limited, firms looking to lease space in Beijing will be forced into decentralised, non-established districts.

Beijing

Percent of market occupied by law firms

Number of law firms occupying > 5,000 sq m in the market

1.8% 5


Prime rents (RMB per sq m per month) $326-417

Grade A vacancy rate 6.8%

Prime Grade A vacancy rate 13.1%

Top 3 challenges for law firms1. Limited availability of prime stock.2. Rightsizing the amount of space.3. Limited 2-3 year pipeline of new office stock.

Top 3 opportunities for law firms1. Significant amount of stock to be developed over the next 5 years.2. Shorter lease terms (2-3 years) allow for more flexibility.3. Strategic planning while waiting for new stock to be built.

Baker & McKenzie China World Tower II 3,500 sq m Renewal

Lee & Li Beijing Oriental Plaza 1,300 sq m Renewal

Allen & Overy China World Tower III 1,700 sq m Relocation & expansion


OUTLOOK



Locational preference: Law firms have traditionally been located in core Central across the older buildings within the Hongkong Land portfolio (largest Central landlord). Ease of access to major banking clients (for corporate practices) scattered around the Central walkway is a key consideration to location. As the legal market has grown, firms have spread to the periphery of greater Central, to Admiralty and Sheung Wan, which are a short distance to the traditional core.

Law firms with a conservative budget continue to take up premises in buildings located in Central’s periphery, where rents are more cost effective. The legal sector has been actively growing over the past 24 months with new entrants and existing firms growing considerably. Operating costs for Hong Kong law firms are increasing as real estate overheads inflate with employment costs. At the same time there has been a significant drop off in IPO and corporate work.

For those firms seeking to relocate, office options are limited as vacancy is still low, and the development pipeline remains constrained until at least 2016. Hong Kong law firms are first looking to densification as a natural cost saver, as traditional space utilisation has changed little in Hong Kong, comparative to other markets. As there is little confirmed new supply in Central, it is likely that the high-end service sector will look further East on Hong Kong Island to lower cost districts that can satisfy business requirements. We see both Wan Chai and Causeway Bay as natural locations to fit this trend in the short term.

Rents are high, but have softened in recent months. Forecasts predict further short-term decline, but overall growth in 2013. Firms would be prudent to position themselves in the market in q4 2012 - q1 2013, where possible, to capture what is likely to be a short-term bottom of the rental market.

Hong Kong

Percent of Central market occupied by law firms


7.0% 2


Prime rents (HK$ per sq ft) $80-$150

Description of available incentives 2-3 months rent free


Overall Central vacancy rate 4.6%

Top 3 challenges for law firms1. With low vacancy rates and a constrained development pipeline, the ability to expand or relocate to reduce costs is limited. 2. Following considerable expansion and challenging economic conditions, firms are increasingly exposed to surplus accommodation. 3. Operating costs for law firms continue to rise.

Top 3 opportunities for law firms1. Short-term softer conditions in the Central district, and real ‘first mover’ opportunities in nearby districts.2. Law firms have an opportunity to modernise their working environments creatively and cost effectively to reduce space requirements.3. New entrants to the market will benefit from flexible second-hand stock.

International law firm Edinburgh Tower 1,196 sq m New lease

RPC Three Exchange Square 997 sq m New lease


OUTLOOK



Locational preference: The major law firms in Melbourne are all located in the CBD. Many firms are congregated in the city’s legal precinct surrounding the courts in the west end of the city, with premium and Grade-A buildings on Collins Street, Bourke Street and William Street accommodating many legal firms. Some prominent firms are located in the east end of the city on Collins Street. This is considered a prestigous part of the city with many banking and finance firms also located here. Both areas are well served by trains, trams and retail amenities. Despite Melbourne’s CBD extending to Docklands and Southbank precincts, the legal fraternity are yet to embrace these locations.

The Melbourne property market has become relatively subdued in recent months, with economic sentiment reflected in a general slowdown in transactions in the market. This change in the market dynamic, coupled with recently completed developments adding to the supply of office stock and an increase in organisations streamlining and consolidating office space, has led to market conditions favouring tenants. This time last year predictions were for the market to shift towardss landlord-favourable conditions in 2013, however we believe that the market will either be in balance or favour the tenant until 2016.

There is a general sense among major law firms operating in Australia that they have ‘topped out’ in terms of overall size. In other words, the large firms are not anticipating future growth in numbers. Indeed several have trimmed staff numbers in the last three years. Factors influencing this include a strong desire to maintain profitability for the existing partners and a focus on making the size and structure attractive for mergers with international firms.

A number of changes in the ‘top end’ landscape have occurred in the last three years as a result of a range of mergers and alliances. In addition, international firms Allen & Overy and Clifford Chance have recently established Australian offices. Only Clayton Utz, Minter Ellison and Corrs remain as purely ‘local’ among the national Australian firms. At the smaller level, there has been a continuation of mergers and acquisitions. Few of the large firms will appear in the market for office premises over the next period as most either have a number of years to run on their current leases or have yet to take up space in new developments which they have committed to over the last three years. Most major law firms are not captive to property cycles/availability of space as they tend to go to market in sufficient time to enable new development to take place.

Melbourne



4.4% 18


Prime rents (A$ per sq m per annum) 517 (Gross rents)

Description of available incentives 20% based on first year’s net rent over a 10-year term


Overall vacancy rate 7.9%

Top 3 challenges for law firms1. The decision whether to merge with international firms will impact cost metrics and place pressure on firms productivity, impacting the efficiency of office space.2. Limited new supply of suitable buildings, with respect to location and contiguous space, may result in more firms renewing rather than relocating in the interim.3. A general business slowdown will limit the growth of firms and the need to expand office premises.

Top 3 opportunities for law firms1. A tenant-favourable market creates good opportunities for firms to commit to an early renewal or relocate to capitalise on high incentives on offer.2. Melbourne CBD rents are considerably lower than other East Coast capitals, making Melbourne a good place to expand operations and accommodate back-

office functions.3. Consider alternative workplace models to bring space usage per person more in line with other professional services firms and to improve space efficiency.

Lander & Rogers 600 Bourke Street 5,400 sq m Renewal

Gadens 600 Bourke Street 6,600 sq m Renewal


OUTLOOK



Locational preference: Most foreign law firms are located in the CBD, particularly in the financial district in Lujiazui, Pudong and West Nanjing Road in Puxi. Local firms tend to be more dispersed, with offices in the CBD. However the three biggest domestic law firms have now relocated to premium Grade A offices.

Over the past year, law firms have slowed down their expansion plans in Shanghai as economic uncertainty has contributed to a slower growth environment. While overall leasing demand has been subdued, a small percentage of law firms, especially domestic firms, have remained active in the Grade A and Premium markets. For example, two domestic law firms have leased over 3,000 sq m each in the soon-to-be-completed Jing An Kerry Center Tower 3. Many domestic law firms are now looking to upgrade their office space from lower-quality buildings in an effort to improve their image and focus more on their client-facing services.

Law firms have traditionally preferred to locate in the core-CBD areas of Puxi and Pudong, which allows them to be close to the financial sector firms and major MNCs, which are their primary clients. In the remainder of 2012 and 2013, space in this core-CBD area will be limited, meaning that law firms looking to expand may be hard-pressed to find adequate lettable supply.

As economic stimulus measures slowly improve sentiment and the basic need for legal services grows, we expect that law firms will resume plans to expand or upgrade over the next 12 months.

Shanghai


3


Prime rents (RMB per sq m per month) $273.70

Prime Grade A rents ($ per sq ft per month) $323.90


Prime Grade A vacancy rate 6.9%

Top 3 challenges for law firms1. Low vacancy in existing premium Grade A buildings.2. Pudong and Lujiazui have limited premium Grade A space from now until end q4 2013. 3. Rightsizing the amount of space.

Top 3 opportunities for law firms1. Large amount of stock to be developed over the next 5 years.2. Strategic planning while waiting for new stock to be built.3. Greater leverage as landlords compete to attract law firms.

Chinese law firm Jing An Kerry Center Tower 3 3,420 sq m Relocation

International law firm Two ifc 900 sq m Relocation

International law firm Two ifc 1,600 sq m Relocation


OUTLOOK



Locational preference: The majority of law firms in Singapore are located in the Central Business District to be close to their client base. A high concentration of these are in prime office space in the Raffles Place CBD sub-district. The trend over the last 3-4 years has been for the larger international and domestic law firms to relocate their operations to the new developments in Marina Bay. While typical floorplates in Raffles Place range from 8,000- 15,000 per square foot, the newer Downtown Developments can offer larger, more efficient floorplates of approximately 25,000-30,000 sq ft.

Singapore is an important business, financial and legal hub for South East Asia, with a large number of international companies having set up their Asia Pacific headquarters in the city state. The majority of multinational businesses see Asia as the major driver for revenue growth, and this has increased the demand for legal advisory services.

In 2008 Singapore granted licences to a handful of ‘qualifying Foreign Law Practices’ (qFLP) including White & Case LLP, Latham & Watkins, Clifford Chance, Herbert Smith, Allen & Overy and Norton Rose. The Singapore government has continued to liberalise the legal sector and in August 2012 the Singapore Ministry of Law closed the second round of submissions with over 23 firms filing applications. The Licences will only be granted based on the quality of the applicants that commit to recruiting locally and hitting specific revenue targets. Announcements on the successful firms are likely to revealed over the next 3-6 months.

The overall market conditions remained stable in the first half 2012 as most business sectors have maintained their headcount and tried to limit capital expenditure. There has been positive net absorption supported by expansion of existing tenants and from new entrants to Singapore.

Rental rates have dropped off modertately since mid-2011 but the decline is slowing. Due to the completion of a number of new office buildings, this has increased the overall supply and provided more choice to occupiers looking to expand or relocate. Prime office space in Singapore can now be secured from SGD $9-12 per square feet per month.

Singapore



3.5% 4


Prime rents (SGD $ per sq ft) $9.00-$12.00

Description of available incentives Typically through rent free during the initial period of the lease.



Top 3 challenges for law firms1. Limited talent pool in Singapore due to the increase in new firms opening offices in Singapore. 2. Increase in competition in the market. 3. Rightsizing and making sure firm has sufficient space to accommodate potential growth, while maintinaing flexibility.

Top 3 opportunities for law firms1. Greater space availability.2. Rents likely to continue their declines in Core CBD untill mid-2013.3. Increase in landlord incentives.

Milbank Tweed Marina Bay Financial Centre Tower III 1,300 sq m New lease relocation & expansion

Clyde & Co Marina Bay Financial Centre Tower III 1,400 sq m New lease relocation & expansion

Freshfields Bruckhaus Deringer Ocean Financial Centre 700 sq m New lease


OUTLOOK



Locational preference: Top-tier law firms are predominantly located in premium towers with expansive harbour views within the CBD core. Ashurst are the first major firm to commit to an alternative premises solution being the low rise, large floorplate, heritage refurbishment of 5 Martin Place. Barangaroo, essentially the Canary Wharf of Sydney, has yet to gain a law firm commitment ahead of its 2015/2016 completion. Gilbert & Tobin (10,000 sq m) is felt likely to be the leading contender to make such a move.

There is a general sense among major law firms operating in Australia that they have ‘topped out’ in terms of overall size. In other words, the large firms are not anticipating future growth in numbers. Indeed several have trimmed staff numbers in the last three years. Factors influencing this include:

• A strong desire to maintain profitability for the existing partners; and• A focus on making their size and structure attractive for mergers with

international firms.

A number of changes in the ‘top end’ landscape have occurred in the last three years as a result of a range of mergers and alliances. In addition, international firms Allen & Overy and Clifford Chance have recently established Australian offices. Only Clayton Utz, Minter Ellison and Corrs remain as purely ‘local’ among the national Australian firms. At the smaller level, there has been a continuation of mergers and acquisitions. Few of the large firms will appear in the market for office premises over the next period as most either have a number of years to run on their current leases or have yet to take up space in new developments which they have committed to over the last three years. Most major law firms are not captive to property cycles/availability of space as they tend to go to market in sufficient time to enable new development to take place.

Sydney rents reflect a two-tiered structure where existing Grade-A stock is relatively plentiful with several opportunities with tenants of up to 8,000-10,000 sq m, at a discount to replacement costs. New developments, by their nature, reflect a pre-commitment rental which covers the cost of development. Current rentals in Sydney for premium grade properties range from A$900 to A$1300/sq m administrative, with incentives of around 25% of gross face rentals. Grade-A rentals sit in the range A$600 to A$1000/sq m administrative with incentives of up to 30% of gross face. There has been an almost universal change in the ratio of lawyers to support staff, with most firms now operating at up to five lawyers per admin support, and many firms are targetting a ratio of 7:1.

Sydney



4.2% 18


Prime rents (A$ per sq m per annum) 925 (Gross rents)

Description of available incentives 26 to 30% of the gross rental based on first year’s rental multiplied by the term in years



Top 3 challenges for law firms1. Dealing with reduced ratio of legal to support staff while maintaining an ‘open feel’ to office fitouts.2. Many firms face similar expiry profiles in the coming years, leading to firms needing to evaluate needs with sufficient planning.3. Impact of international firms and mergers placing increased pressure on productivity and revenue, leading to real estate costs needing to be more closely monitored.

Top 3 opportunities for law firms1. Relocation of firms to Barangaroo site in the coming years will create good back-fill opportunities within the CBD for legal firms.2. Large incentives on offer for firms looking to commit to space in a tenant favoured to neutral market dynamic.3. Blurred and expanding ‘core CBD’ area shifting further south and westwards should help constrain rental growth.

TressCox 19 Martin Place 3,500 sq m Relocation

Corrs Chambers Westgarth 8 Chifley Place 10,000 sq m Relocation

Ashurst 5 Martin Place 15,000 sq m Relocation


OUTLOOK



Locational preference: The legal sector in Tokyo shadows the financial sector and major firms are located in and around the large banking and financial institutions. The favoured locations are Chiyoda ku and Minato ku with popular locations being Marunouchi, Otemachi (average Grade A rent – JPY 38,264 per tsubo per annum inc CAM) Akasaka and Roppongi (average Grade A Rent JPY 32,900 per tsubo per month inc CAM).

The first half of 2012 has seen a continuation in the ‘flight to quality and safety’ which defined 2011. Rentals in the CBD appear to have bottomed out, and over 2011 and in 2012 companies have seized the opportunity to relocate and upgrade the quality of their space, forcing down vacancy rates across Tokyo and forcing up vacancy in Grade B space. The average age of the Tokyo Grade A stock remains comparatively old, albeit that many central office districts have been regenerated over the last 10 years. For the majority of tenants this represents good news, with larger floorplates and more efficient buildings.

However, the legal industry still favours perimeter offices and the trend for larger, deeper and more efficient floorplates has negatively impacted on their layout and floor design with fewer external offices per sq m and a less efficient space utilisation for law firms. Tenants in office buildings with smaller floorplates require approximately 50 sq m per perimeter office, and tenants in larger buildings with deeper floor plates require approximately 60 sq m per perimeter office.

Activity in the legal sector over recent years has been driven more by lease events rather than expansion in law firms’ operations. Most law firms have stable space requirements and are looking for cost savings through lease renegotiations. Recent activity has focused on new developments where deep discounts are on offer.

Tokyo



1.5% 5


Prime rents ($ price per sq ft per year) $116.00

Description of available incentives 9 - 12 months rent-free

Grade A CBD vacancy rate 3.55%

Top 3 challenges for law firms1. Limited availability of prime stock.2. Rightsizing the amount of space. 3. Limited 2-3 year pipeline of new office stock.

Top 3 opportunities for law firms1. Strong longer-term supply pipeline for Tokyo.2. Preleasing in a slow market.3. Increasing vacancies in older high-quality Grade A properties.

US Law firm Ark Hills Sengokuyama Mori Tower 1,500 sq m Relocation

US Law firm Ark Hills Sengokuyama Mori Tower 5,000 sq m Relocation


OUTLOOK



EMEA


Locational preference: The largest international and domestic law firms are generally located in the Zuidas district. The Zuidas district is home to law firms including Baker & McKenzie, Brauw Blackstone Westbroek, Loyens & Loeff among others, with exception for Allen & Overy and Lexence which are located in adjacent South district. The Zuidas can be characterized as a multi-functional location with good accessibility by road and public transport. Many smaller law firms are located in the city centre of Amsterdam especially around the canals at Herengracht and Keizersgracht. The buildings here have a modern classical image which suits the law firm occupier.

After small signs of a recovery in the Dutch office market, occupier activity has declined again. In the Amsterdam market, competition for office space in the submarket of Zuidas decreased in 2011, down 66% on 2010. Demand from law firms is subdued. Besides the cost containment focus of occupiers, law firms are increasingly adopting the trend of flexible working, which is likely to result in a declining demand for any expansion of their office space. Nevertheless, there are signs of positive activity in the legal real estate market, with two significant firms in latter stages of negotiation to relocate their offices to new office buildings.

The overall Amsterdam market is still characterised by a large amount of oversupply, particularly in more peripheral areas, where choice is inflated by less suitable accommodation and a lack of alternative functions. However, in the last year, the municipality was agreed on several conversions of office buildings to hotels outside of the City core.

The general conditions of high vacancy and oversupply are much less significant in the submarkets preferred by law firms. In fact, due to the absence of new completions, the choice for law firms of Grade A vacancy decreased slightly to 8.1% over the last quarter. The decreasing Grade A vacancy level could cause problems over the medium term for law firms that are looking to expand or relocate. Our expectations are that the amount of available incentives will be stable or decrease slightly during the next year.

Amsterdam



11.9% 11


Prime rent (sq m per annum) €335

Description of available incentives 10-16 months rent-free on a standard lease term



Top 3 challenges for law firms1. Limited new construction over the next three years will force law firms with near-term lease expiries to renew in place or consider second-generation space.2. High fit-out costs will continue to influence relocation decisions.3. Adapting to emerging trends in flexible working.

Top 3 opportunities for law firms1. General conditions of oversupply within the Amsterdam office market means that if law firms are willing to renew or relocate then they do have leverage.2. Opportunities to drive efficiency and productivity in the workplace.3. Limited competition anticipated in the market in the short term.

Allen & Overy 9913 sq m lfa

Boekel De Nerée 11400 sq m lfa Renewal


OUTLOOK



Locational preference: Most the law firms in Brussels are located in three major districts: Decentralised, Leopold and Louise. The eastern part of the Pentagon is an alternative location, especially at the border of the Leopold and Louise districts. Large international law firms tend to concentrate in the Decentralised district where availability is higher, the Louise district gradually decreasing in importance and attracting smaller size and local law firms.

2012 has been a relatively quiet year for law firms in Brussels, due to the weak economic climate and the fact that several of the largest international law firms have already renegotiated their lease terms in 2010-2011. Other large law firms approaching a lease-break are exploring options in their occupation, moving to a smaller cheaper office building or renegotiating and improving the terms of their existing lease contract, with a 20% rent reduction being possible for a long-term lease. Most larger legal practices are generally right-sizing their occupation in Brussels or keeping their portfolio size unchanged, with only smaller players, administrative and European law firms seeing growth.

Vacancy is high at 11.1% and rental values are under pressure, offering opportunities for law firms in the best districts, however the development pipeline has dried up significantly as a result of tighter development financing conditions. Although headline vacancy levels remain high, the proportion of high-quality offices available does remain relatively low, and Grade A vacancy is considerably low at 2.7%. The market is currently tenant-favourable, and conditions should remain relatively favourable in 2013.

Brussels



2.0% 12


Prime rent (per sq m per year) € 285

Description of available incentives12% average rent free on a five -- year term



Top 3 challenges for law firms1. Existing lease commitments could limit the ability to benefit from current market opportunities (several law firms active in the market have breaks only in two years time.)2. The office development pipeline has dried up; there are a limited number of high-quality opportunities in the districts favoured by law firms.3. Despite the current slowdown in tenant demand, the market could be undersupplied by 2013 due to the lack of new construction, which could drive rents higher in 24 to

36 months.

Top 3 opportunities for law firms1. Currently high vacancy rates in some districts implies more incentives and lower rents.2. Tenant-favourable market: landlords ready to discuss lease terms to keep their existing tenants.3. Consolidation and upgrading will be portfolio quality.

Orrick, Herrington & Sutcliffe LLP Rue d’Idalie 9-15 - 1050 Brussels 292 sq m New deal to the market

Loyens & Loeff Neerveld 101 - 1200 Brussels 7,605 sq m Renewal


OUTLOOK



Locational preference: Dubai. Most of the international law firms are located in the DIFC (Dubai International Financial Centre) or in nearby locations within the CBD such as Emaar Square and along Sheik Zayed Road. While DIFC is a free zone, these other locations are on shore locations and therefore require firms to have a local sponsor.

Abu Dhabi. The recently-delivered Sowwah Square development has become the location of choice for international law firms in Abu Dhabi. This landmark complex of commercial towers features column-free floorplates and the first full office floor of each building starts 110 feet above ground level. A landscaped plaza connects the four buildings and the new Stock Exchange at ground level.

Most legal practices entered the UAE market at a time when space availability was limited. Over the past three years, large volumes of new space have been delivered which has resulted in greater choice for the tenant. The market has seen law firms move to better quality buildings at lower rents with consolidation being the primary driver of law firm demand. Although the large-scale expansion and growth by law firms in the UAE has slowed in the wake of the Global Financial Crisis, demand for top-quality space remains high.

Proximity to clients and competitors has driven many of the location decisions in the region. In Abu Dhabi much of the legal market has been focused on the energy sector and sovereign wealth, whereas in Dubai the focus has been much more on financial services. Average requirements usually range from 10,000 to 20,000 sq ft in Dubai, falling to 2,500 to 5,000 sq ft in Abu Dhabi.

Overall market conditions are tenant-favourable in both Dubai and Abu Dhabi, however headline statistics often belie the actual conditions that law firms will find on the ground. Competition is markedly higher for appropriately located, prime space favoured by law firms. Despite this fact, given current availability of better quality space, the time is right for law firms to review their long-term occupation strategies in the UAE.

Dubai & Abu Dhabi

Average percent of market occupied by law firms


5-10% 2


Average prime rent (AED per sq m ) (Dubai / Abu Dhabi) 1,615-2,368 / 1,600

Incentives

At least one month rent free for each year of the lease commitment

Grade A CBD vacancy rate (Dubai/Abu Dhabi) 35%/30%

Top 3 challenges for law firms1. Finding appropriately located, single ownership, prime office space.2. Attracting legal talent to the Middle East.3. Increasing competition in the market place.

Top 3 opportunities for law firms1. Greater space availability.2. Increasing landlord incentives.3. Tenant-friendly leases.

Chadbourne & Parke Boulevard Plaza, Dubai 1,000 sq m Relocation

Hadef & Partners Emaar Square, Dubai 2,600 sq m Renewal

Al Tamimi Sowwah Square, Abu Dhabi 1,600 sq m Relocation


OUTLOOK



Locational preference: Law firms are concentrated in prime CBD locations such as near the Alte Opera in Frankfurt, the city centre districts of Hamburg and Munich, the CBD or Hafen in Düsseldorf, and in Mitte 1A or Potsdamer Platz in Berlin.

While Frankfurt is normally regarded as the main legal centre in Germany, there is more happening beyond this important financial center. Munich has more attorneys than Frankfurt; the largest deal in 2012 was in Stuttgart; Hamburg is seeing the highest rate of growth among law firms; and, as the capital city, Berlin is an important legal centre, even if operations are smaller than in Frankfurt or Munich.

In contrast to other countries, the legal industry in Germany is stable and strong. Moreover, Germans are taking on more prominent EMEA or global roles in top international firms. Germany has become a centre for IP litigation, with a number of headline-making cases in the last year. German firms, such as Luther and Noerr, clearly have ambitions to expand overseas. Many firms are growing, often poaching senior rainmakers or teams from established outfits. New firms, notably British firms such as Pinsent Masons and Berwin Leighton Paisner have established operations in Germany. Many firms already in Frankfurt or Munich have opened new offices, particularly in Düsseldorf and Hamburg.

This stable business growth has translated into steady demand for prime offices across Germany. While there are isolated cases of the subleasing of space in Munich and Frankfurt, demand here is mostly stable. Hamburg and Düsseldorf have seen increased demand. While not at acute levels, availability at the top end of the market is dwindling. Construction levels are generally low; for example only two major projects are under construction in prime area of Munich, while Frankfurt will only witness more supply in 2013/14. Larger firms with requirements above 10,000 sq m are looking at new project developments or build-to-suit options. Rents are up in some cities, Munich particularly, although we do not expect any dramatic increases.

Law firm workplaces often spark an interesting discussion, but operations in Germany tend to be traditional (e.g. cellular) and efficient and have not adopted some of the innovations seen in places like London. With relatively few good options for larger operations, and the investment required to be made into any law firm space, many firms are electing to restructure leases and restack, or make cosmetic upgrades as lease events force decisions.

Germany

Top 3 challenges for law firms1. Dwindling vacancy in prime offices. Fewer large, contiguous blocks in quality buildings and limited construction pipeline.2. Potential rent increases, although not severe.3. Tension in strategy where German business is performing well, but pressures overseas impact approvals of any projects.

Top 3 opportunities for law firms1. Pre-leasing opportunities exist particularly in Frankfurt and Berlin. For smaller tenants, there are select opportunities to take advantage of subleases with existing fit-outs.2. For larger tenants with leases rolling in 2013-2015, now is a good time to restructure leases in advance of rental increases. 3. A more efficient workplace design may yield significant space savings, particularly where a firm has grown organically.

Dierks + Bohle Kurfürstendamm 195, Berlin 2,594 sqm

Gleiss Lutz Bülow-Carré, Stuttgart 10,000 sq m

Heuking Kühn Lüer Wojtek One Goetheplaza, Frankfurt 2,958 sq m

Reed Smith Ludwigstraße 6-10, Munich 2,575 sq m

White & Case, LLP Dammtorwall 15, Hamburg 5,950 sq m

Epping Hermann Fischer Am Hirschgarten, Munich 4,784 sq m


OUTLOOK



2-7% 60


OUTLOOK


OUTLOOK


OUTLOOK


Berlin PRICING AND INCENTIVES

OverallPrime rent (sq m per annum) €264Description of available incentives 3-5%Vacancy rate 8.6%

PRICING AND INCENTIVESOverallPrime rent (sq m per annum) €264Description of available incentives 7-8%Vacancy rate 8.1%

OUTLOOK


Cologne

OUTLOOK


Hamburg PRICING AND INCENTIVES



Munich

Düsseldorf PRICING AND INCENTIVES



Frankfurt

Stuttgart PRICING AND INCENTIVES


OUTLOOK


OUTLOOK



Locational preference: Small to mid-sized law firms, particularly US and international, tend to locate in Core City locations, whereas established UK and large international law firms (70,000 square feet plus) will locate in peripheral City Fringe locations or Canary Wharf in order to benefit from discounted rents and to hedge against significant rental increases at future rent reviews.

There has been steady demand from law firms for office space over the first half of 2012, which has resulted in 14 transactions, totalling 227,833 square feet (sq ft) of floorspace. This is well below the long-term half-year average of 361,000 sq ft, although it is close to three times higher than the same period one year ago and already equates to 76% of the total floorspace taken in the whole of 2011. Overall law firm activity accounted for 11% of total take-up in the City office market in the first half of 2012, which compares favourably to 9% of overall take-up in 2011. The largest transaction in the first-half of 2012 was to: The Practical Law Company who acquired 88,546 sq ft of second-hand space at Friars House, SE1 at an initial rent of £35 per sq ft. Another significant transaction is in the pipeline; Nabarro is reportedly under offer for 130,000 sq ft at 125 London Wall on a sublease from JP Morgan.

At the end of the second quarter there were 24 active and potential law firm requirements. Of the larger requirements, there were four in the 50,000 to 100,000 sq ft bracket and three in the 100,000 to 200,000 sq ft bracket. Looking ahead, there are over 20 US law firms with lease events between now and 2015, which will generate further demand.

Activity in the legal sector is currently driven by a combination of lease events and increasing levels of merger activity. A selection of recent activity includes: Herbert Smith’s merger with Freehills, the Pinsent Masons and McGrigors merger, and the prospective forthcoming mergers of Ashurst with Blake Dawson, Dickinson Dees with Bond Pearce (not signed), and Field Fisher Waterhouse and Osborne Clarke (not signed).

Mid-tier firms such as Eversheds, SJ Berwin, Addleshaws and Field Fisher Waterhouse have now realigned occupational space with their operations, having sublet or disposed of 15% - 20% of their space.

There is a growing trend to outsource low grade legal work, with many corporates looking to hand over routine legal work to lower-cost suppliers. Some big corporations, including Rio Tinto, are outsourcing routine legal tasks, fuelling growth among providers of outsourced legal services.

London City



14.0% 54


Prime rent (sq m per annum) € 708

Description of available incentives 24 months rent free assuming a 10-year lease



Top 3 challenges for law firms1. Achieving greater space efficiency without impacting on working practices or the need to attract and retain talent. 2. Minimising capital expenditure without compromising growth trajectory or opportunity (eg renewal of leases, acquiring fitted-out space etc).3. The ‘squeezed middle’ facing a choice between building scale (merger) or value through specialisation.

Top 3 opportunities for law firms1. New growth opportunities in the BRICS, Far East and Africa.2. Opportunity to build a new operating and funding model as permitted by The Legal Services Act.3. Driving further efficiency through outsourcing and nearshoring.

Bindmans LLP 222 Gray’s Inn Road 1,951 sq m Relocation and expansion

Latham & Watkins 99 Bishopsgate 2,189 sq m Renewal and expansion

The Practical Law Company 157 Blackfriars Road 8,226 sq m Relocation and expansion


OUTLOOK



Locational preference: In Madrid, a significant majority of law firms, regardless of their size, are located in the CBD submarket, specifically on Castellana Street and its borders; towardss the east, in the Salamanca submarket; and on the western side of the axis, in the areas of Almagro or Zurbano. Smaller firms are frequently located in mixed-use buildings. As firms become more significant in size, they look for representative buildings to support their marketing strategies and reinforce their ‘brand image’. Of the top 25 law firms, 96% are located in or around these areas.

The current macroeconomic environment, and favourable real estate market conditions, are pushing law firms of all sizes to consider their strategic decisions regarding their real estate portfolios in Madrid. Present market conditions are perceived as an opportunity to relocate head offices, not only reducing rents, but gaining access to formerly ‘unattainable’ highly representative locations.

The activity observed throughout the year has been focused on renegotiating leases, undertaking serious refurbishments (Uría Menéndez) or completing fit-outs (Cuatrecasas). The Linklaters Madrid office is about to close a transaction of over 5,000 sq m but most of the legal activity transactions are smaller than 2,000 sq m. While maximum rental levels continue to trend downwards and rent-free periods remain unchanged in general, the actual transactions vary significantly on the individual situation of each company.

Restrictions on available credit are holding tenants back. Another factor that makes movements in the market difficult is the fact that the legal sector has very high fit-out costs: law firms in Madrid have not fully embraced the trend of adopting open workplaces and clear areas. Highly compartmentalised offices are still preferred, as well as above average fit-out qualities and furnishings. In the current market, landlords are very keen to retain occupiers, offering tempting concessions to ensure renewals.

Madrid


Percent of law firms comprising active tenants in the marketNumber of law firms occupying > 5,000 sq m in the market

3-5% 4



Description of available incentives 4-12 months rent-free on a standard term



Top 3 challenges for law firms1. Relocation and fit-out costs may not be fully recovered if, over the medium term, prices start to increase sharply and tenants lose their negotiation strength.2. Significant difficulties within the present market conditions to obtain the capital required to undertake relocation and fit-outs.3. Tough macroeconomic environment and impacts of the broader business environment.

Top 3 opportunities for law firms1. Landlords of vacant buildings are offering very attractive conditions in order to fill their properties.2. Tenants find themselves in a very strong position to negotiate renewals, as landlords want to avoid vacant properties by all means.3. Rental falls in the CBD are brining opportunities for tenants to improve locations at low rental levels.

Linklaters Almagro 40 5080 sq m Relocation

Chávarri y Muñoz Abogados Emilio Vargas 1 730 sq m Relocation

Mazars Alcalá 63 2,373 sq m Relocation


OUTLOOK



Locational preference: Law firms in Milan remain attracted to prime office space in locations that ensure proximity to their client base. The major law firms in Milan are located in the Historic Centre (comprising the very central area of Milan around Piazza Duomo, Piazza San Babila and delimited by Via Senato and Via Fatebenefratelli to the North), the CBD (including the area to the north of the Centre, divided from the Historical Centre by Via Fatebenefratelli/Via Manin and Via Solferino and including the sub-district previously known as Garibaldi Centrale) and the Centre (comprising the area partially delimited by Cerchia dei Bastioni city-ring-road and by Via Bertani, Via Pagano, Via Ariosto, Viale di Porta Vercellina, Viale Papiniano and Viale D’Annunzio).

H2 2011 and H1 2012 saw law firms taking up just under 7,000 sq m across five deals, representing a decline in floorspace by approximately 23% on the previous 12 months. The moves have contributed 3% of the overall 12-months take-up and are concentrated in traditionally prime central locations of the city: the Historic Centre, the CBD and the Centre.

The legal sector is being affected by the uncertain macroeconomic backdrop, translating in unclear market dynamics which make it difficult to assess whether the time is right to move or whether further reductions in rents are yet to come. This in turn induces a more cautious approach in tenants, as they wait to see whether better lease conditions can be achieved; this could well be the case, as the increasing vacancy and weak demand reported in q2 seems to suggest.

Furthermore, the completion of the Porta Nuova scheme in the newly-defined CBD both offers an opportunity and poses an additional challenge to law firms. On one hand, it provides Grade A space in a highly-accessible location; on the other, it is a not yet fully consolidated office location and, as such, may be a risky choice for the traditionally conservative law sector.

Milan



3.0% 4



Description of available incentives 6 - 9 months rent free

Vacancy rate in Historic Centre 7%

Overall Vacancy rate 11%

Top 3 challenges for law firms1. Uncertainty in the economic environment translating into uncertain business performance: is it the right time to grow/ change?2. Uncertainty in the evolution of rental levels: is it the right moment to sign a new lease?3. Uncertainty in the potential of a new geographic location: will it be a successful CBD or not?

Top 3 opportunities for law firms1. Release of traditional office space in the Historic Centre.2. Growth in supply in the CBD.3. Law firms negotiating positions strengthened by investors’ appetite for law firms among their tenants.

Eversheds Bianchini Via Maria Teresa 4 960 sq m Relocation

White & Case Piazza Diaz 1 1,070 sq m Relocation


OUTLOOK



Locational preference: The majority of law firms in Moscow are attracted to central locations in the city (CBD) with the Kremlin Area and the north west area inside the Garden Ring being the most sought-after locations. In terms of office space requirements, the majority of law firms continue to demonstrate a preference for high-profile modern office buildings.

Currently, law firms occupy a 3% share (around 50,000 sq m) of the modern office stock in Moscow. Starting from 2010 and throughout 2011, the legal sector hasrebounded with several new transactions (including Hogan & Lovells, Akin Gump, King & Spalding) and renewals (including Noerr, Cleary Gottlieb) concluded on the Moscow market.

This sentiment has continued in 2012 with one of the largest transactions executed - a pre-let by Baker & McKenzie (7,000 sq m) in White Gardens located on Belorusskaya Square and the renewal of Skadden in Ducat III (1,700 sq m). Many international law firms have seen solid business growth in recent months, stemming largely from their Russian clients, and this is impacting real estate requirements. Building obsolescence has also driven a number of requirements among those clients who have been in Moscow for a number of years.

Since q2 2011, prime rents have remained stable at US$ 1,200 sq m/year with the forecast for a slight increase (no more than 2-3% ) during the next several quarters.

Nevertheless, limited supply in the city centre of Moscow (especially for tenants seeking large blocks of space) and a very low pipeline of high-quality buildings for the next two years, will force more law firms to study pre-lets more closely as well as the potential for a geographic shift towardss Moscow City.

Moscow



3% 4


Prime rent (sq m per annum) $1,000-1,200

Description of available incentives 3-6 months rent free period + ad-ditional incentives.



Top 3 challenges for law firms1. Recent construction restrictions in the CBD are constraining choices for law firms, with many forced to renew their existing space or consider secondary/refurbished space.2. The lack of new office projects coming to the market in the CBD may result in prime rents increasing over the medium term.3. The current euro-zone crisis may lead some law firms to reconsider plans for expansion or may drive contraction.

Top 3 opportunities for law firms1. With a very low supply pipeline in the CBD, we expect that Moscow City will become more prevalent as an alternative location for law firms.2. Two Class A developments (White Gardens and Aquamarine III) are forecast to enter the market by the beginning of 2013 and can be expected to generate interest

among law firms.3. Although prime rents are expected to rise, this increase should not be as steep as it was in 2007-2008 when prime rents reached $US 1,500-1,900/sq m/year.

King & Spalding Legend BC, Tsvetnoy blvd., 2 1,507 sq m Pre-lease

Skadden Ducat III, Gasheka Ul., 6 1,687 sq m Renewal

Baker & McKenzie White Gardens, Lesnaya Ul. 27 7000 sq m Pre-lease


OUTLOOK



Locational preference: Law firms are generally located in period buildings, in some of the most prestigious addresses in Paris. These are mostly on the right side of the river Seine, in the Central Business District (CBD). Within the CBD the core market for law firms has slowly evolved from the ‘Golden Triangle’ (between Place de l’Etoile and Concorde) to the ‘Financial District’ (towardss the east of the CBD, between Concorde and Place Vendôme). This trend has been confirmed this year, with the top three transactions completed in this submarket.

The Legal market in Paris continues to consist of a range of large ‘magic circle’ and US players, as well as some weighty French practices, followed by a sizeable number of medium and small-sized practices, providing more niche competencies. The real estate challenges in Paris differ greatly, depending upon the size of the space required by a firm.

The emerging trend towardss leaving the traditional independent town houses and period buildings continues, in order to settle in new offices, that provide larger floorplates, offering great layout possibilities and accompanied with a wide range of services. Shared buildings are also emerging as new office solutions, among small and medium practices, although larger players remain attached to the identity and independence of a more traditional single-tenant building.

Change is also being seen in terms of office space utilisation and specification, with traditional walled offices beginning to include more glass and transparency, and even be replaced by shared desks and semi open-spaces. During the past months, law firms have been more and more concerned with the ‘green’ quality of the buildings, and the clear trend is towardss more efficient buildings, enabling an overall decrease of the space allocated per person. Larger law firms looking for space in excess of 5,000 sq m will find a very limited number of large units of prime space in the prestigious locations required. Smaller, independent units are more widely available in Paris CBD.

Paris

Percent of the market occupied by law firms


2% 18



Description of available incentives 15-20% of the annual headline rent

Parisian region vacancy rate 6.8%

CBD vacancy rate 5.1%

Top 3 challenges for law firms1. Financial constraints due to tougher operating conditions will put pressure on law firms to speed up workplace transformation.2. Defining the ‘right’ office size: law firms will have to combine higher flexibility with better control of their real estate costs. 3. Shortage of high-quality supply in the traditionally-preferred submarkets.

Top 3 opportunities for law firms1. Competition for space is relatively low at present.2. Leases can be favourably renegotiated by large tenants, on the condition that they agree on an extension of additional years.3. Incentives offered by landlords can be quite significant.

King Spalding 12 Cours Albert 1er 75008 Paris 2,400 sq m Relocation

SJ Berwin 92 Avenue des Champs Elysées 75008 Paris 3,500 sq m Relocation

Hogan Lovells 17 Avenue Matignon 75008 Paris 7,000 sq m Relocation


OUTLOOK



Locational preference: The major law firms in Warsaw are located in the central locations (Central Business District and City Centre). Of the top 10 firms, three are located in Rondo 1 office building and two are situated in 53 Emilii Plater Street (Warsaw Financial Centre), which are the most prestigious buildings in Warsaw.

The majority of international law firms started to seek opportunities for expansion in Poland and Warsaw after Poland’s accession to the European Union. Before 2004 law firms operating in Warsaw comprised mainly of local participants and Warsaw’s legal market remains at a relatively early stage of development, with future growth prospects promising. Only 5 of the 50 biggest law companies in terms of the employment, have over 100 employees, and 12 have 50-100 employees.

The recent preference among law firms operating in Warsaw has been to renew in their current premises rather than to relocate to new buildings, as is evidenced by the three major transactions concluded in the past 12 months.

However, the amount of choice for law firms in Warsaw is on the increase. Currently over 183,100 sq m of new modern office space is under construction in Warsaw’s central locations, 40% of which should be completed within 12-16 months. At the end of q2 2012 approximately 8.18% of stock remained vacant (7.77% in the Central Business District and 8.46% in the City Centre), which corresponds to 100,200 sq m of available space for potential tenants. Due to the large volume in the pipeline, the market is expected to see a slight upward pressure on this ratio in H2 2012 and especially in 2013. Prime office space in Warsaw City Centre can now be secured from €22-25 sq m per month. However, there are some A+ developments quoting rents even higher than this.

Warsaw



2.0% 11



Description of available incentives 4 to 6 months rent free + fit-out contributions

Top 3 challenges for law firms1. Limited availability of office space in buildings considered as top properties.2. Some A+ developments quote rents even higher than prime headline rents in the City Centre.3. Driving greater efficiency and productivity from the workplace.

Top 3 opportunities for law firms1. Large number of pipeline developments competing for pre-let agreements.2. Attractive lease conditions available for those willing to sign pre-let agreements. 3. Tenant leverage likely to increase going forward as choice increases.

Squire Sanders Rondo 1, Rondo ONZ 1, 00-124 Warsaw 1,600 sq m Renewal

Allen & Overy Rondo 1, Rondo ONZ 1, 00-124 Warsaw 2,,297 sq m Renewal

DLA Piper Warsaw Financial Centre, 23 Emilii Plater Street, 00-113, Warsaw 2,310 sq m Renewal


OUTLOOK



Contacts

For more information contact:

Americas brokerage

Thomas E. Doughty International Director [email protected] +1 202 719 5652

Elizabeth K. Cooper International Director [email protected] +1 202 719 6195

Chris Murray Managing Director [email protected] +1 202 719 5010

Philip I. Leibow Managing Director [email protected] +1 202 719 5765

Gregory J. McCavera Managing Director [email protected] +1 202 719 5779

Bella Schiro Senior Vice President [email protected] +1 202 719 5834

Asia Pacific brokerage

Asia Pacific Jeremy Sheldon Director - Head of Markets [email protected] +852 2846 5288

Beijing Eric Hirsch Director [email protected] +86 10 5922 1263

Hong Kong Alex Barnes Director [email protected] +852 2846 5125

Melbourne Michael Greene Director [email protected] +61 7 3231 1355

Shanghai Anthony Couse Director [email protected] +86 21 6133 5555

Singapore Jerome Wright Director [email protected] +65 6494 3754

Sydney Tony Wyllie Director [email protected] 61 2 9220 8729

Tokyo Neil Hitchen Director [email protected] +81 3 5501 9203

EMEA brokerage

Amsterdam Pieter van der Peet Tenant Representation [email protected] +31 20 540 7932

Brussels Eric Orban Director [email protected] +32 2 550 2529

Dubai & Abu Dhabi Robin Pugh Director [email protected] +971-4-4266966

Germany Randall White Director [email protected] +49 69 2003 1216

London Richard Proctor Director [email protected] +44 (0)207 399 5252

Madrid Peter Kamp Tenant Representation [email protected] +34 91 789 11 00

Milan Yannis De Francesco Director [email protected] +39 02 85 86 86 90

Moscow Kate McMurtrie Director [email protected] +7 495 969 54 39

Paris Simon Williams Director [email protected] +33 (0)1 40 55 17 10

Warsaw Jakub Sylwestrowicz Tenant Representation [email protected] +48 22 318 00 48

Research

Tom Carroll Director – EMEA Research [email protected] +44 20 3147 1207

John Sikaitis Senior Vice President - Americas Office Research [email protected] +1 202 719 5839


The tough economic and operating conditions firms have faced since the global financial crisis of 2008 have forced many businesses to manage operating costs more actively. Law firms have clearly not been immune to that pressure....

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law firm perspective global 2012

Real Estate