Included in the annual JLL Law Firm Perspective released this quarter, is an account of how Lathan & Watkins law firm recently chose to commission an entirely new office building in the Del Mar Heights submarket rather than snap up available space in an existing building. Why incur the expense and hassle of doing this in a market that still has more than 14 percent total countywide office vacancy?
This decision is important because it could apply to all industries.
The availability of large blocks of Class A office space in San Diego is limited, which is the first and most important information in JLL’s research. It has become increasingly difficult to find space more than 25,000 square feet as law firms are starting to expand again.
This supply constraint led Latham & Watkins to opt for a 70,000-square-foot built-to-suit building this year. Other local law firms in the market for 30,000 square feet or more face an uphill battle, as do firms in other industries with similar space requirements.
Speculative office construction is only just beginning in San Diego. However, The Irvine Company’s One La Jolla Center project in UTC will deliver 306,000 square feet of Class A office space in 2015, which will provide additional options for law firms and others. In the meantime, some firms are looking to do more with less space and this, too, reflects a trend in many types of businesses.
JLL’s review of the top 35 U.S. law firm markets indicated that market by market, 55 percent to 90 percent of law firms have already devised substantial efficiency measures in new or restructured leases. In San Diego, law firms are creating greater efficiencies by creating smaller, more uniform-sized offices and eliminating vacancy once held for growth, which is now planned more conservatively and typically addressed through expansion options.
Sound familiar? Perhaps you’re seeing dedicated, four-walled offices traded for open and collaborative workspaces? Eating and meeting spaces are blending? Often, these efficiencies, which may also boost productivity, mean that firms of all types can reduce their space requirements and increase their real estate options.
Those options can be important for myriad reasons. However, one reason is particularly important to service-oriented industries: They tend to follow clients. Law firms are included in this group, and when technology and life science firms started to cluster around UTC, Sorrento Mesa and Del Mar Heights, so did law firms (and many other service providers). It wouldn’t be surprising to see some of these same firms return or expand downtown if the tech cluster there continues to grow.
In industries where proximity to clients is important, firms want to have access to a good selection of real estate options. Maintaining flexibility in floor plans and workspace configurations may keep those firms nimble enough to follow the migration habits of their clients.
One thing that won’t change, though, is that the submarkets attracting San Diego’s leading industries and the businesses that serve them maintain the highest asking rents. Law firms tend to gravitate to UTC, Del Mar Heights and downtown. Asking rents for Class A space in these markets average 15 to 30 percent higher than in the San Diego region overall.
For law firms and others with upcoming lease expirations, market timing is critical, as firms are losing leverage in lease negotiations as we transition to a landlord-favorable market. In fact, JLL’s Law Firm Review predicts 77 percent of North American cities will see a rise in rents due to scarcity of available office space.
On average, law firms have seen rents rise 3.3 percent year-over-year nationwide and pay an 18.1 percent premium for trophy space. San Diego firms pay only a 5 percent premium for trophy space so far, and if they can find it.