Legal Leading the Way for Top Regional Offices

Our Head of UK Regional Offices Research, Kiran Patel, looks at the Race for Space Among Top Law Firms

In 2023, the legal sector reported its strongest year in terms of leasing activity since 2016 across the Big Five office markets (Birmingham, Bristol, Edinburgh, Leeds, and Manchester). With 346,227 sq ft transacted, the sector amounted to 11% of the total annual volume – also the highest figure since 2016 – and well over double the 124,937 sq ft leased in 2022. With 125,724 sq ft of legal leasing, H1 2024 was well-above the first half of 2023 when 83,357 sq ft transacted. 

Looking at the type of offices being leased by the legal sector, there is a strong focus on Grade A quality accommodation. In fact, 83% of the Q1 2023 to Q2 2014 volume leased by the sector across the Big Five was of Grade A quality, peaking at 93% in Birmingham. Legal occupiers are exceeding the average across each of the Big Five markets in this regard, even as the well documented ‘flight to quality’ pushed the Grade A market share up to a record high of 62% across the Big Five in 2023. 

BEST OF THE BEST

In fact, transactional evidence suggests that for many law firms, ‘better’ is not good enough – they look only for the ‘best’ in terms of their offices.

The stacking plan of 103 Colmore Row, Birmingham is filled with lawyers. Legal firms including Browne Jacobson, No5 Chambers, Shoosmiths and Weightmans occupy seven of the 17 office floors within the best-in-class space – the terms of many of which challenged the headline rent for the city.

Manchester’s No.1 St Michael’s, due for completion in the summer of 2024, has also attracted the attention of legal occupiers. Hill Dickinson and Pinsent Masons both enacted pre-lets in Q3 2023 within the development at £42.50 psf and £43.00 psf respectively, both of which were well above the previous headline rent at the time of £40.00 psf for Manchester. 

Hill Dickinson have also been active in Leeds, leasing 9,000 sq ft at 11 Wellington Place in May 2024. Irwin Mitchell, Freeths and Leigh Day have also recently made considerable commitments in excess of 10,000 sq ft in some of the best office spaces available in the city. Other major schemes in Leeds were also reported to be under offer to law firms at the close of Q2 2024 which are expected to push the prime headline rent above £40.00 psf for the first time.

At EQ – the new benchmark for office space in Bristol and beyond – has attracted the law firm, Knights, who have taken 6,000 sq ft for a record £48.00 psf – the new top rent in the Bristol market and the highest achieved across the Big Five to date. Birketts have also taken space in EQ, while DAC Beachcroft took 44,196 sq ft on the top two floors at the under construction Welcome Building in Q1.

In Edinburgh, while legal activity has been more muted recently, the sector still claimed the second largest lease of 2023 with MFMac taking 16,435 sq ft at 9 Haymarket Square on assignment. The limited activity in the sector is partly attributable to many legal occupiers having already moved within the last five years. As these leases move toward expiry (the average lease term for legal occupiers in the Big Five is 6.2 years) the number of requirements from the sector is starting to rise again. 

DEMAND > SUPPLY

Grade A supply shortages and the curtailed development pipeline present across the Big Five mean that legal activity over the medium term may be more limited. At the close of Q2 2024, there was just 1.1 years’ worth of Grade A supply across the Big Five, with Birmingham reporting the lowest levels of supply at just 0.6 years. With a combined under construction pipeline of just 2.1 million sq ft across the Big Five – the lowest level since at least 2016 – these supply pressures look set to continue.

Limited Grade A availability combined with the demonstrated preference for quality held by the legal sector (and the wider demand pool of Big Five occupiers) indicates that competition is likely to remain high for the dwindling supply of best-in-class spaces, leading to further rental growth at the top end.

The growth reported at the top end of the office market is an evolving trend. Cushman & Wakefield have previously published analysis looking at how the ‘best’ is becoming increasingly differentiated from the ‘rest’ in terms of quality and rents. As the legal sector – amongst others – continues to drive this rental growth trajectory and strong occupier demand more widely, prospective developers will hopefully be able to commit to bringing much-needed new, top quality space to the Big Five office markets.

WHAT AND WHY

The reasons for this strong preference for quality – and the willingness to pay a premium for it – are multifaceted. There is certainly a talent component, with high quality workspaces helping companies to attract and retain the best staff as well as increasing office occupancy. This is particularly relevant to the legal sector where the war for talent is consistently high as the supply of labour rarely matches demand. Broad sector level unemployment data from ONS supports this notion with the professional, scientific and technical grouping (which includes the legal sector) reporting an unemployment rate of 1.85% versus 4.30% overall in Q1 2024. Spaces that deliver on employee wellbeing and enable the hybrid, collaboration-focused role of the modern office are therefore of high priority.

Additionally, office rents have increased at a slower rate than wages historically, now standing at record-low levels proportionally. Consequentially, offices are comparatively good value and so investments in better quality workspaces are easily recouped through improved employee retention and reduced hiring costs. There is also a branding element, with a firm’s office communicating the quality and values of the company itself to both its employees and its clients. 

Sustainability also comes into the equation, with many legal firms pursuing ambitious net zero carbon commitments. As a service-focused sector, offices make up a large proportion of their overall emissions – hence only the most accredited, top performing buildings will suffice. 

LEGAL LONGEVITY

Looking ahead, a reasonable question to ask is: can the momentum in the legal sector be sustained? Lease expiries data suggests that strong activity in the sector is likely to continue – if not pick up – through to 2030. Across the Big Five, between 2025 and 2030, an average of 94,419 sq ft worth of legal lease expiries are scheduled each year – over double the 43,369 sq ft average between 2020 and 2024. With competition amongst regional firms particularly hot, getting into the best spaces to attract top talent and impress clients is likely to remain high up on the agenda as these lease events occur. 

Combined with the limited development pipeline across the Big Five markets, this suggests that the legal sector will continue to be acquisitive over the medium-term, seeking out the best spaces and putting upward pressure on rents as a result.