Alternative service providers, flexible office space, rightsizing and new commercial developments are among the factors affecting the legal real estate market, according to the latest research from real estate services firm JLL.

JLL's annual Real Estate Perspective looks back at the environment for law firms at the national and local level, as well as other trends affecting the legal industry and the strategy firms should employ. For 2019, JLL identified several themes affecting law firms after nearly a decade of economic expansion, including the use of alternative service providers; whether the trend toward co-working spaces could be utilized by the legal industry; the benefits and drawbacks of resigning a lease or relocating; and the continued expansion of new law firm office space.

"The fact that we're hitting more than a decade of growth is really a surprise," said Phil Ryan, senior manager of U.S. office research for JLL. "The scale of expansion is notable, in terms of the economy [as a whole] as well as the real estate side."

The decline in students attending law school since the beginning of the Great Recession, coupled with more attorneys reaching retirement age, presents a risk to firms. However, the report said the use of alternative service providers is largely mitigating this slowdown in the workforce, meaning firms have more flexibility to utilize unique space and relocate some operations to emerging markets to attract different workers.

Rising demand for co-working spaces could affect law firms, according to JLL. That sector of the market is growing at a rate of 23% per year, with more than 82 million square feet of flexible work space in the country in 2019. That could concern law firms if it prices firms out of affordable options. It isn't a good solution for many law firms because of privacy concerns.

Many firms coming to the end of their 10- or 12-year leases will be faced with the question of whether to re-sign or relocate. In the face of an economic slowdown, the first round of rightsizing can save a firm millions in rent, but continued office space contraction can harm a firm's culture and yields less savings over time, according to JLL.

Despite some of the challenges law firms face in the real estate market, a prolonged period of economic expansion is providing them with more options for new space. There have been 119.8 million square feet of new space developed in this cycle, and millions more are under construction. As the pipeline for new development expands in the next few years, JLL said, market dynamics will become more neutral and may even shift in favor of tenants.

JLL's report identified trends in key markets for law firm growth, including Atlanta, Boston, various cities in Texas, New York, Philadelphia and more. Although fancy developments such as Manhattan's Hudson Yards have become a magnet for large firms looking to relocate or open a new outpost in a big city, upstart cities such as Phoenix and Dallas have surpassed New York and Washington, D.C., in growth, according to a report earlier in the year by CBRE.

"This really goes to show how resilient the market has been—not just in the gateway markets, but also the secondary ones," Ryan said. "There's a need for talent across the board."

As fears increase about the health of the U.S. and global economies, Ryan said it is necessary for law firms to be proactive about how they can grow in both the short and the long terms.

"There's great importance placed on long-term planning for firms and what they want their offices to be like," he said. "From a geographic perspective, you want to be amenable to younger talent. You have to have space that exceeds everyone's expectations, but also exceeds financial expectations. In order to achieve all of these things, firms must make a concerted effort to be aware of market opportunities, looking at the short term and the long term of not just the U.S. as a whole, but also where these smaller hubs are going."

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