Law firms new to the Texas market are leasing more space in Dallas and Austin, a direct result of expansion into Texas by out-of-state firms, but new leasing came to a halt in Houston by midyear, a new report says.

Those trends are not surprising, when considering that law firms headquartered outside of Texas have recently chosen to launch new offices in Dallas or Austin instead of Houston.

From the third quarter of 2018 through the second quarter of 2019, law firms new to the market accounted for 9.9% of office space leases in Austin and 16% in Dallas, according to a report from real estate services company CBRE. During that same period, no law firms new to the Houston market struck lease deals.

The 2019 North American Legal Sector Trends report notes that Dallas/Fort Worth is one of the low-cost areas where law firms are opening offices, in contrast to big markets such as New York and Washington, D.C., where growth has slowed. Both Austin and Dallas/Fort Worth were key markets for legal service employment growth, according to the report.

Kevin Kushner, an executive vice president for CBRE in Houston, said the fact that no new law firms signed lease deals in Houston during the 12-month period is significant.

"There was this onslaught of major firms opening offices in Houston, [but] it's trailed off recently," Kushner said.

The most recent splashy office launches in Houston date back to early 2018, before the time frame of CBRE's latest report. Shearman & Sterling opened a Houston location in May 2018, and White & Case launched its Houston office in February 2018.

Kushner said the uncertainty in energy markets is likely to blame for the slowdown in firms moving into Houston, because most of the large firms that have recently been looking into Houston's real estate market have energy practices. He declined to identify any of those firms.

According to the report, new law firm leases for nearly 1 million square feet of space in Houston were signed during the 12 months, but all were renewals or relocations for firms already in the city. Vinson & Elkins, which will move to the Texas Tower once it opens in 2021, signed the largest lease, for a total of 212,000 square feet.

In contrast to Houston, Dallas is booming. Phil Puckett, a vice chairman in CBRE's Dallas office, said he's never in his 30-year real estate career seen so much law firm activity in the city.

He noted that firms new to the market are leasing space in the central business district, as well as in the trendier and pricier uptown area. The Klyde Warren Park, which is built over the Woodall Rodgers Freeway in Dallas, joins the two areas.

In Dallas, law firm leases during the 12-month period totaled 701,161 square feet of space, with 55% in the central business district—79% when including uptown. The largest law firm deal during the 12-month period was Hunton Andrews Kurth's renewal and expansion that totaled 109,443 square feet in the central business district, the report said.

John Gump, a senior vice president with CBRE in Austin, said the office space market is strong in Austin, and the majority of the Am Law 200 firms are located within the central business district. He said Baker Botts is moving across the river from downtown in a new-construction building called RiverSouth, but it's within walking distance of downtown.

The market is very tight, he said, with a 4% vacancy rate for Class A space in downtown Austin. Much of that competition for Class A space is driven by technology companies that have taken large blocks of space, including Amazon, Apple, Google, Facebook and Indeed, he said.

In Austin, between July 2018 and June 2019, law firms signed leases for 335,200 square feet of space, with 39.1% in the central business district, according to the report. The biggest lease deal was DLA Piper's relocation and expansion to a 69,500-square-foot office in a building under construction in downtown Austin.

CBRE considers Austin a growth market for law firms. Gump said it's easy to see why.

"It seems like every time I kind of look up, there's a new Am Law 200 firm coming into Austin, or hiring attorneys, or taking over another firm," he said.

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