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News release

Australia

Tougher operating conditions have had a pronounced impact on the real estate strategies of law firms

Global Report  reveals law firm real estate trends vividly illustrate current global economic polarisation


AUSTRALIA , 14 NOVEMBER 2012 — As clouds remain on the macroeconomic horizon, law firms will need to adopt an increasingly vigilant approach to the management of their real estate portfolio to ensure that assets are optimised, according to Jones Lang LaSalle’s Global Law Firm Perspectives 2012. 

Opportunism will be evident in some real estate markets as law firms react to the changing environment. 

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.

Australian Head of Tenant Representation at Jones Lang LaSalle, Steve Urwin said, “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 in Australia.  In fact several have trimmed staff numbers in the last three years.  Some of the factors influencing this include a strong desire to maintain profitability for the existing partners and, in the mid and top tier firms, 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.

“Whilst, since the GFC, the economic conditions in Australia have been the envy of the western world, law firm managements are realistic about the tough climate ahead.  Asia is however seen as a growth market for legal services,” said Mr Urwin.

The trends for Australian law firms include:

• 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 else have yet to take-up space in new developments which they have committed to over the last three years;
• The traditional focus on prime locations and trophy buildings will remain for the large firms, but there will be an increasing emphasis on workplace productivity and space efficiency.
 
Mr Urwin said, “Lease expiries will remain the key driver of real estate activity, acting as catalysts for change and analysis of real estate strategy.
 
“Changing workplace ratios and the drive for increased productivity are challenging the legal profession to consider a range of more collaborative environments than the traditional legal office.
 
“In Sydney and Melbourne, 2016 is a year of reasonably significant legal lease expiries, leading to potential increased competition for space.  Brisbane currently shows a peak in 2017 with approximately 25,000 sqm of such expiries,” said Mr Urwin.
 
Australian Director of Corporate Solutions at Jones Lang LaSalle, Michael Greene said law firms needed to consider the state by state dynamics and variances in the current market and position their firm accordingly when deciding on the right time to make the move in regard to their office accommodation.
 
“We believe the Sydney market will favour the tenant for the next two to three years, before moving to a more balanced market.  Sydney rents reflect a two-tiered structure where existing Grade-A stock is relatively plentiful with several opportunities for tenants of up to 10,000 sqm at a discount to replacement costs. Current rentals in Sydney for premium grade properties range from A$900 to A$1300/sqm, with incentives of around 25% of gross face rentals. Grade-A rentals sit in the range A$600 to A$1000/sqm with incentives of up to 30% of gross face.
 
“In contrast, 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 towards landlord-favourable conditions in 2013, however we believe that the market will either be in balance or favour the tenant until 2016.
 
“For firms located in Sydney, one of the big challenges is that many of them face similar lease expiry profiles in the coming years, leading to firms needing to evaluate needs with sufficient planning.  One of the opportunities for the Sydney market is that the relocation of tenants to Barangaroo in coming years will create good back-fill opportunities within the CBD for legal firms.
 
“For firms located in Melbourne, limited supply of suitable buildings, in terms of location and contiguous space presents a challenge and may result in more firms renewing rather than relocating in the interim.  One of the opportunities for firms in Melbourne is that a tenant-favourable market creates good opportunities for firms to commit to an early renewal or relocate to capitalise on high incentives on offer.
 
“Demand in Brisbane has been very strong until the recent slowdown in commodity prices.  This has seen tenant demand noticeably subdued and incentives are rising in response to this lack of demand.
 
“Moving forward, there are three large towers mooted for the Brisbane market.  If none of these get out of the ground, when demand rebounds there will be a stock shortage.  If one tower gets out of the ground, equilibrium will be maintained.  If two or more get out of the ground, the market will remain tenant favourable for several years,” said Mr Greene.​