How to conquer space
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30 September 1997
Rather like a first time housebuyer, the move to a larger home for a law firm can often be a traumatic one. Outgrowing an existing office always raises a number of issues.
The move for City firm Linklaters & Paines to its new international headquarters at Milton House and Shire House, Silk Street in 1997 has already been publicised as the largest pre-let deal in the UK. But setting a commercial property precedent was not the deciding factor for the firm's move.
Robert Finch, chair of Linklaters' premises group and property partner explains that the move was prompted by the expiry of the existing lease of Barrington House (which in 1955 had a rent of 16 shillings per sq ft).
The firm had been looking for a suitable property since the mid-1980s. Finch says the new premises in Silk Street provide "the combination of the right location and the right financial product and terms which allow the firm to compete with the competition as well as the architectural flexibility of a modern office development close to the core".
It is envisaged that Linklaters will move lock, stock and barrel at the end of 1997 to occupy over 300,000 sq ft of the 450,000 sq ft development. Finch adds: "What drives any move is that law firms are obviously aware that some staff work horrendous hours, and they have to be given the proper facilities to do the job properly for the clients."
The attraction of modern
facilities at a sensible cost is one of the main considerations for law firms and despite the availability of office space, firms such as Linklaters have encountered difficulties in finding property which meets all of their requirements.
And moving further than 10 minutes by foot or taxi from the essential client core as well as other City solicitors is considered an anathema by many of the practices entrenched in the City.
Apart from the organic growth of many firms making an office move a necessity, recent mergers have resulted in office-hopping and relocations by a number of firms. Nabarro Nathanson's merger earlier this year with Turner Kenneth Brown left one of the former TKB buildings in 3-5 Norwich Street vacant. City firm Macfarlanes has acquired that 22,000 sq ft space, across the street from its main office in 10 Norwich Street.
Macfarlanes managing partner Roger Formby comments that the sheer convenience of the building's proximity to the firm's existing office was the main factor for the acquisition, along with the modern facilities available in the 3-5 Norwich Street building.
The fact that the building had previously been occupied by solicitors was not necessarily an advantage - it is currently undergoing a complete refit ready for occupation by Macfarlanes in early 1996.
The former TKB staff were subsumed into Nabarros' Stratton Street Office, but regionally, Nabarros will be moving its Doncaster practice into new premises at Victoria Quays, Sheffield early next year.
Head of Nabarros northern practice Susan McKenna explains that the firm opted for the new 40,000 sq ft offices because their existing office "was no longer suitable for the needs of a modern legal practice".
She adds: "It was a deliberate decision not to go into Leeds. Our research among clients and others indicated to us that Leeds is essentially over-lawyered."
Recent deals indicate that the market for tenants has improved and that puts law firms looking to upgrade their premises in a stronger bargaining position.
And with developers less willing to proceed with speculative developments, firms which are likely to be anchor tenants are often able to unlock stalled development deals, and negotiate more favourable rents and terms.
Most of the City firms made their major moves in the early 1990s, taking advantage of the drop in commercial property rates. Until now, Linklaters and Lovell White Durrant were the only major players still to consolidate their premises.
But Bradley Baker, a partner in Knight Frank & Rutley's City agency department which acted for Development Securities, the developers of Milton House and Shire House, predicts that although it is still fundamentally a tenant's market, there are signs of a perceivable shift back towards the landlord. Other institutional tenants such as Deutsche Bank are paying up to £40 rent per sq ft.
He adds: "We are seeing major pre-letting terms beginning to harden up, with rents starting to escalate. And the net worth of the incentive packages are decreasing because of the dwindling supply."
Linklaters is believed to have agreed a rate in the high £20s for its new offices.
It is estimated that the proportion of vacant property around the 'prime' area of the City is below 10 per cent (about 10 million sq ft), which is half of the 1991 figure.
The driving force behind the market is the increase in large pre-lets, with tenants being forced to pre-let because of the lack of suitable property that is available.
Slaughter and May partner Melvyn Hughes discounts the report in the Estates Gazette that Slaughters was also thought to have been bidding for the two Silk Street properties but lost out to Linklaters. He adds that the firm is looking to move and that rumours are inevitable about the target properties.
Baker predicts that rentals will rise in the next two years until new developments are finished. He says: "Generally, there is a more positive feel than at the beginning of 1995 - there is four times the amount of development than in 1994, and there is every sign that the end of this year will be an active one for other institutional tenants. It is basically the supply and demand equation in operation."
But it is not just the big players that have been on the move. US firm Millbank Tweed Hadley & McCoy took advantage of a break in its existing lease to move to the top floor of Dashwood House in 69 Old Broad Street to occupy 8,300 sq ft there.
Savills associate director Philip Pearce considers these types of deal part of a market which is increasingly characterised as one of "whales and minnows, with the whales who can often beach themselves anywhere driving the market, whereas the smaller players, that is, those looking for between 0 and 10,000 sq ft, also driving that demand. There is not much demand for properties in between."
He says the emphasis is on cutting costs and negotiating the best deal rather than just looking for something new.
Another factor for many firms may be that they are locked into long leases which were entered into during the boom of the mid-1980s. But with the millennium approaching, they will have to gear up to move into the 21st century physically as well as technologically.