Law firms continue to expand in lower-cost areas with large talent pools, while growth in dominant markets such as New York and Washington, D.C., has plateaued, according to a study by real estate giant CBRE.

The new report on legal employment and real estate trends found that the U.S. legal sector has continued to grow in emerging markets, where low business costs and talented millennial workers have attracted firms looking to expand.

CBRE also identified key markets for potential future growth based on legal industry labor and real estate costs—particularly for large firms looking to establish back offices outside their core markets.

Overall, Phoenix was the national leader in legal service employment growth, which includes lawyers, paralegals and administrative staff, with a 9.6% increase, CBRE found. Following Phoenix was Austin, Texas, at 9.1%; Atlanta at 8.9%; Orlando, Florida, at 7.4%; and Dallas/Fort Worth at 5.1%.

"What, to me, jumps out the most is the consistency of what we saw last year," said Julie Whelan, CBRE's head of occupier research, adding that in the cases of Phoenix and Orlando, growth in 2018 had accelerated from the previous year.

"While the epicenters for legal services still continue to be the major gateway markets, they've plateaued in terms of legal services employment," she said. "[Emerging] markets are great from an overall business perspective, and they're the ones that continue to grow the fastest."

In the major markets of New York, Los Angeles, Chicago and Washington, D.C., only LA has shown real legal employment growth in recent years, the report found, with lawyer employment growth of 13.2% and legal services employment growth of 3.8% between 2016 and 2018.

Meanwhile, national law firm footprints have expanded. Almost a quarter of Am Law 200 firms moved into at least one new location in 2018, according to CBRE, and in the same year, law firms expanded by 2.1 million in square feet, compared to 1.6 million in 2017.

The Dallas/Fort Worth region grew the most, with 261,201 square feet of net absorption—total new square footage leased minus the total square footage vacated. The city was followed by Los Angeles, with 210,580 square feet; Manhattan, with 118,869 square feet; Austin, with 91,976 square feet; and Silicon Valley, with 87,685 feet.

"From a national perspective, law firms have taken more space than contracted out, so we're in net-positive territory," she said.

Whelan was quick to point out that these markets differed substantially in size—in Manhattan, nearly 120,000 square feet of expansion was "not even a ripple"—and the study noted that despite the expansion, space absorption associated with law firm leasing increased only slightly last year.

"Although there is growth from a secondary market perspective form a firm, they really are being conservative and smart about what they're doing—we're not in the wild west, in terms of taking tons of space to satisfy needs," she said.

In the study, CBRE also identified various markets that are already established or particularly attractive for law firms looking to create or expand back-office operations centers for needs such as IT, finance, litigation and marketing. Established markets, which are more expensive than growth markets but still relatively affordable, have a good depth of skill and scalability. CBRE named Atlanta, Dallas/Fort Worth, Denver, Phoenix and Tampa, Florida, as established markets.

On the other hand, growth markets have a good balance of back-office workforce and cost. CBRE identified Austin; Charlotte, North Carolina; Columbus, Ohio; Jacksonville, Florida; Kansas City, Missouri; Nashville, Tennessee; Oklahoma City; Orlando; Raleigh, North Carolina; and Salt Lake City as top contenders.

Whelan added that at more than 10 years into an economic cycle, law firms are in "unprecedented territory."

"Law offices, in general, are at the point right now where they are really struggling with a profit vs. expense scenario," she said, noting that real estate is becoming even more expensive, especially in gateway markets, making it even more important for firms to be strategic in terms of location and size.

"In some cases, firms may decide to increase efficiency by going to a much smaller space—where they may be paying more per square foot for a smaller size," she said.

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