Law firm contractions cause a drag on District of Columbia office market growth (and the solution may be technology)
The space efficiency trend that began in the wake of the most recent recession continues to hamper growth in the DC office market. This trend has been particularly popular with law firms, which occupy approximately one-third of the core DC office space. Law firms have found it easy to decrease their space needs, with technology replacing the need for some support personnel, huge corner offices for partners decreasing in popularity, and law libraries now nearly extinct. With the average lease term of 12.5 years for a law firm, this trend is still working its way through as leases expire. And it does not appear to be close to over yet either.
From 2008 to 2013, DC law firms contracted by nearly 650,000 square feet from a combination of downsizing, mergers and dissolutions. Based on future space needs, law firms are expected to return nearly a million square feet back to the DC office market over the next five years from increased space efficiency alone. This is in addition to any potential mergers or dissolutions that may come into play. While law firm profits are relatively healthy, it is generally understood in the industry that profits will likely never return to the “good old days” and heads of major law firms say to expect more mergers and possibly a few dissolutions to come.
So what has happened to all of this space that has come back to the market? Most of it has already been subleased. While law firms may be increasing efficiency, they still occupy some of the highest quality space in the market. There has always been a strong demand for trophy office space in the DC office market so when it becomes available at a discount via sublease, it is often snatched up rather quickly. This flight to quality has been at the expense of the commodity office space, a glut of which is likely to be vacated as tenants upgrade in the wake of the law firm shuffle.
With law firms and DC’s other huge tenant base- the federal government- both contracting, DC will need to attract a new industry in order to sustain the leasing levels it once had. One solution to this quandary could be the high technology tenant base that has been so rapidly growing in other parts of the country. In San Francisco, tech tenants have shown an affinity for less conventional office spaces like converted factories and outdated office buildings that they can renovate and design to their unique standards. As local developers and economic development officials have already noted, attracting technology tenants to DC may be the office market’s saving grace.
By: Nathan Edwards
Director of Research, Cassidy Turley - Washington, D.C.
Email Nathan: Nathan.Edwards@cassidyturley.com
Contributor: Bethany Schneider, Research Analyst, Cassidy Turley
Follow Cassidy Turley on Twitter: @CassidyTurleyRE