It’s negotiating time for a handful of big law firms that fill Richmond’s office towers.
Three downtown firms that together lease more than 600,000 square feet of office space are coming to the end of their leases in the next 36 months, and their next moves could change the face of commercial office space in the city.
According to half a dozen office brokers and landlords, McGuireWoods, Hunton & Williams and LeClairRyan will all decide this year whether they will renew their leases, move, downsize or build something new.
Other downtown firms are already on the move.
BrownGreer is vacating almost 35,000 square feet in the Canal Crossing building for new digs in Rocketts Landing. SunTrust is subletting more than 60,000 square feet in two of its buildings, including the SunTrust Center at Ninth and Main streets.
And on June 30, more than 100,000 square feet of space in Riverfront Plaza’s west tower will become available when a lease by the former Wachovia Securities expires. The firm moved out of Richmond in 2007, leaving almost 200,000 square feet in the tower vacant. Parts of it were leased to other companies, including BB&T.
According to CBRE broker Will Bradley, more than 1 million square feet of office space will be up for renewal between now and 2015. In the worst-case scenario – everyone moves to the suburbs – vacancy could spike as high as 30 percent in Richmond’s core business district, he said.
Brokers unanimously said it’s unlikely that all the major office tenant’s shopping around for future space would pack up for such places as Innsbrook. But brokers and landlords foresee declining rental rates and a scramble to fill space. Rent for Class A office space downtown hangs around $18 per square foot per year.
“If you are a tenant looking for Class A office space, the opportunity to upgrade at lower prices is a real possibility,” said Charlie Polk, head of Jones Lang LaSalle’s Richmond office. “Rates are going to go down, and landlords are going to have to offer some concessions. Without question, by any standard, it’s going to be a tenants market by this summer.”
McGuireWoods occupies almost 200,000 square feet at One James Center, and its lease expires in 2015, according to multiple sources. Hunton & Williams occupies more than 300,000 square feet at Riverfront Plaza’s east tower, with its lease also expiring in 2015. LeClairRyan occupies about 200,000 square feet between 411 E. Franklin St. and Riverfront Plaza’s east tower, with leases expiring in 2014 and 2015.
According to several sources with close knowledge of the discussions, McGuireWoods is considering building a tower on a parcel of land between the Dominion building at Eighth and Cary streets and the firm’s current building at James Center.
Cole Clarkson, a tenant rep broker with 7 Hills Advisors, said he’s closely watching to see what McGuireWoods does.
“If McGuireWoods decides to vacate, it would create a lot of competition in a market where there isn’t much velocity,” Clarkson said. “If they move forward and build their building, it will be a big-time tenants market.”
Building a skyscraper would come at a premium, said Jeff Cooke, a broker at Cushman & Wakefield | Thalhimer. Although the rents downtown range from $18 to $25 per square foot per year in the older buildings, rent in a new building could easily exceed $40 per square foot per year, he said.
“Because it’s brand-new construction, the developer has to recover the direct cost of the building,” he said. “Once it matures, rents can go up or down depending on the market. In fact, over the past 20 years, the cost of rents haven’t really changed that much. But the cost of construction and land has skyrocketed, and that’s going to be reflected in the rent.”
The lease negations come at a time when many businesses, big law firms in particular, are looking to lower their overhead.
Gary LeClair, co-founder and chairman of LeClairRyan, said some law firms are bloated and are still in lavish, pre-recession offices.
“In our peer group, the average firm spends about $40,000 per year on rent per lawyer,” LeClair said. “That number probably needs to be in the range of $10,000 per year per layer. Lawyers can’t pass on the cost of palaces on to their clients.”
LeClair said that lawyers needed to come to grips with a changed and less lucrative legal landscape, and that that should inform how they make real estate decisions going forward.
“The golden age is over for law firms,” he said. “We’re in a new legal era, and the new normal for law firms is the old normal for every other industry. And lawyers need to get over it. Their law degree doesn’t entitle them to live under a different set of economic principles than any other industry.”