Studley's Tom Fulcher predicts that D.C. landlords will face an uneasy time filling scores of new office space coming on the market by 2014, even as normally reliable law firm leasing activity slackens significantly.
Law firms, normally one of D.C.'s tenant mainstays, have needed less space lately. And the city's best chances for expiring law firm leases are still far into the future. Add those together and you get one thing: worried landlords.
Sluggishness in a sector that often fills about 35 percent of D.C.'s office space can prove detrimental. There's been little movement on a net basis among available 100,000-square-foot blocks of space in the past year, after 15 deals of more than that size were inked as of last month, 34 such large blocks still remained available in the District. Only five to six law firms - vs. double that in past years - are looking for 50,000-plus square feet.
And those tenant-favoring conditions, at least in the legal industry, aren't likely to change anytime soon. The D.C. market is still a half-dozen years away from its next surge of lease expirations for law firms.
In 2016, four law firm leases and 1 million total square feet of requirements will expire. Six law firm leases expire in 2017, affecting 1.7 million square feet of total space.
"There was a flurry of activity at the end of last year," said Tom Fulcher, co-branch manager of Studley's D.C. office. "That has slowed down some. I think landlords are going to have to struggle to fill buildings up."
Instead, despite cheap construction costs, law firms are opting for even bigger savings by staying put. Their lease renewal rate for the past few years has topped 80 percent in D.C., said Tom Doughty, international director of Jones Lang LaSalle Inc.'s law firm practice.
"A lot of it has been driven by the fact that no one has got the cash, and no one wants to put cash out for a new build-out, Doughty said.
D.C.'s largest law firm lease deal this year, and for the past five years, was a renewal. Crowell Moring LLP renewed and expanded under a 380,000-square-foot lease at 1001 Pennsylvania Ave. NW. Wiley Rein LLP and Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates also went the renewal route. Skadden decided to remain in existing offices at 1440 New York Ave. NW after its October 2013 lease expiration even after months of closely watched negotiations with CityCenter D.C. And yet, despite a market tendency for renewals, speculatively built buildings at CityCenter will bring 520,000 new office square feet to D.C. by the third quarter of 2013.
"Those can be top-of-the market numbers with new construction," Fulcher said. "They will really test the market's appetite for space in that price range."
....Indeed, law firms have been further dashing landlord hopes by reducing their quarters this year. Arnold & Porter LLP, whose D.C. lease expires in 2015, already does not use a large chunk of its office space at 555 12th St. NW. Even if the firm stayed and renewed, a significant amount of space would empty up in the Class A building.
"Arnold has been in their space for a long time," said David Lipson, executive vice president and director of Studley's D.C. office. "Standards have changed. As leases expire, firms look for ways to get more efficient. Just about everyone moving is leaving space behind."
McDermott Will & Emery recently signed a deal to vacate its nearly 200,000-square-foot lease at 600 13th St. NW and take 165,000 square feet at 500 N. Capitol St. NW.
"We don't pretend it's a landlord market now, because it's not," said Audrey Cramer of Cushman & Wakefield Inc., which quietly marketed and later resigned its listing of 120,000 square feet of remaining office space at Arent Fox LLP's new home at 1000 Connecticut Ave. NW while it waited for rates to solidify. "It will turn into a landlord's market, probably somewhere at the end of next year or the following year."
Though, that scenario has worked just fine for McDermott, whose D.C. leaders looked at dozens of properties across the region for about a year until finally narrowing their choice to three options in the District.
"We felt there were good economics favoring the tenant that we haven't seen in this marketplace in many years," said Bobby Burchfield, a McDermott partner in D.C. "It's rare when the stars line up to get the best location, the best space and the best economics, but we seem to have hit that right on the nose."