The City property market is in the doldrums, with law firms shelving expansion plans and mergers providing the main impetus for relocating.
In 2004 The Times journalist Simon Jenkins penned a forcefully argued column against moving into swanky new offices that is worth digging out.
“Any outfit moving into a splendid new headquarters is heading for the rocks,” wrote Jenkins. “There are no exceptions. The law is iron-clad. […] New buildings tend to appear just when success is turning into decline. It is the moment when growth comes to a halt. If market share no longer surges, at least headquarters can. Anyone who has built or moved house knows what happens next, trauma and tantrum. […] The networks and loyalties on which any organisation depends are bruised and broken.”
Pros and cons
There are several examples in the legal market that support Jenkins’ rule. Halliwells is the first that springs to mind. There are also some that flout it: Allen & Overy doesn’t seem to have lost any steam since moving into Bishops Square.
But if Jenkins’ law was as iron-clad as he says, you would expect firms to be queuing up for lush new headquarters at the moment, given that precious few are winning new market share. Yet nothing could be further from the truth. Indeed, it is a sure sign of a market in the doldrums that the biggest office move story of late has been CMS Cameron McKenna pulling out of its partial pre-let deal with Hammerson in London’s Principal Place in January.
Camerons senior partner Dick Tyler blamed market uncertainty for the decision, adding that the firm would reassess its options nearer 2015, when the lease on its current premises in Mitre House, Aldersgate Street, expires.
The announcement was followed by rabid speculation that Camerons’ decision was down to an impending merger with Nabarro – which was also rumoured to be moving into Principal Place – but sources at both firms shot that one down pretty quickly. Nabarro is no longer linked with Principal Place, either.
Camerons’ decision was an unwelcome one for the office property market, but the news hardly came out of the blue.
“I wasn’t surprised to hear about CMS pulling out of the Hammerson deal,” says one City developer. “Hammerson made it clear they wouldn’t start without more than one tenant signed up and I think Camerons quite liked the idea of getting out.
“The City’s pretty dead,” he adds. “There’s a lot of churn at the small end of the market – small West End and Mid-Town properties – but anything above that is dead and pre-lets are few and far between.”
Jones Lang Lasalle (JLL) released a report in 2011 stating that although it had experienced a notable increase in demand for office space by law firms in the first half of 2011, it had yet to see this translate into deals. According to JLL, seven firms were looking for office space of more than 100,000sq ft in 2011 and 15 were looking for between 10,000 and 99,000sq ft.
JLL prophesied that activity would pick up in 2012 when the financial disasters across Europe abated and there was more certainty in the market. It is a prediction that has yet to materialise.
“It’s fair to say that lease-driven events are the main reason for law firms moving offices at the moment,” says Richard Proctor, a director at JLL. “Of late, the activity coming from lawyers has been quieter than in previous years, but that’s not surprising. A lot of the firms that we’re talking to don’t want to take more space in London and if they’re going to expand then they’ll do that by using existing space more efficiently or by moving fee-earners outside London.”
One firm that did expand in London in 2011 was Taylor Wessing, which opened a second London office in Old Street, aimed at looking after tech start-up clients.
“We took the view that even though the office was only two miles from [our headquarters] we still had to be there,” said partner Simon Walker, who leads the firm’s tech City team, adding that tech-focused firms in Boston often have offices near the Massachusetts Institute of Technology campus and firms in San Francisco have separate Palo Alto offices.
However, Taylor Wessing opened its office using serviced accommodation, so it was not much of a boost for the property market.
On the move
For all the talk of law firms offering little excitement for property agents, one of the biggest deals in the City in 2011 – if not the biggest – is Trowers & Hamlins’ planned move into Linklaters’ old secondary offices at 3 Bunhill Row, just next to Slaughter and May. Trowers is leasing 101,516sq ft from Linklaters at £44 per sq ft. The lease at Trowers’ old offices at Sceptre Court, Tower Hill, expires in early 2013 and the firm will make the move into Bunhill Row later in 2012.
“This is the biggest thing we’ve done for the past 10 years,” managing partner Jonathan Adlington said at the time of the deal’s announcement, adding that he had looked at landmark buildings such the Shard before making his decision.
The scale of Trowers’ move beat the rest of the market by some margin. According to Proctor other deals have been around the 13,000sq ft mark.
Consequently, Nabarro’s requirement to act before its lease runs out on the 115,000sq ft it rents in Theobald’s Road in 2014 is one of the most exciting and sought-after moves in the City at present. Nabarro is thought to be paying around £45 per sq ft for its current offices, well above the market rate.
The latest talk is that the firm, advised by commercial property consultancy CBRE, is negotiating to sub-let 140,000sq ft of space in JPMorgan’s offices at Alban Gate at around £42 per sq ft. Also, because JPMorgan has 382,000sq ft of space available at Alban Gate, Nabarro has been unable to shake speculation about a tie-up with Camerons, as there is room for both firms in the building.
For the most part, however, activity involving law firms’ offices has been as a result of mergers. Legacy firm Barlow Lyde & Gilbert, which merged with Clyde & Co in November 2011, was doing its best to extricate itself from its lease at Beaufort House on St Botolph Street and move into Clydes’ building, also on St Botolph Street, but was having difficulty as the building’s owner was the Colonel Gaddafi-owned Libyan Arab Foreign Investment Company (Lafico), which was understandably in a state of flux as the Libyan leader was being deposed by rebels. However, in December, Savills reported that 26,124sq ft at Beaufort House was leased at £32.50 per sq ft (with an 18-month rent-free period) to the Financial Services Compensation Scheme.
The merger between Beachcroft and Davies Arnold Cooper is also expected to prompt some office moves, as will the tie-up between McGrigors and Pinsent Masons. McGrigors is expected to move from its offices at the Old Bailey into Pinsent Masons’ landmark premises at Crown Place when their merger goes live on 1 May, although a spokesperson for Pinsents said the firms had not yet decided what they were going to do in Edinburgh, Glasgow and Manchester – the other cities where both firms have offices.
Indeed, just as mergers precipitate office moves, excess office space can prompt firms to start looking at tie-ups.
“One of the things that managing partners and finance directors at firms of all sizes often talk about is how much empty space they have,” says Nick Woolf, a partner at head-hunters Sainty Hird. “Firms are mostly signed up to long leases with upwards-only rent reviews. They might get a rent-free period for a while, but eventually they have to start paying. It’s difficult to predict the demands of space, particularly for new-builds. And if, when the firm moves in, it hasn’t managed to expand like it planned and has a lot of empty space it can’t fill organically, it makes it think about merging or doing a bolt-on with a smaller firm.
“Quite a few merger discussions I’ve heard about have not been about needing to merge because there’s an area of law a firm is not in; it’s quite often a case of ‘we’ve got empty space and it’s costing us a lot of money’.”