"They are leaving Peter to pay Paul," Strain said.
I think this is very true. Right now we are seeing a shuffle of tenants without expanding the base. Its great that these firms are signing onto new buildings that are being built since it shows there is a market for newer and better space, but at the same time Downtown is probably looking at a very high vacancy rate for a while, unless we see some major back filling of these building, which is going to hurt chances of new buildings.
Unless the market for downtown offices expands and back fills that empty space, either from significantly growing companies like Downey Brand is, or even better, bringing companies from the suburbs and firms not in Sacramento already to the city, instead of firms just moving around, its going to be tough to see more space in the near future.
Currently Meridian II at 15th and K, as well as The Cordano Building at 8th and L are in the pipe that would account for another ~450K in office space.
With higher vacancy rates you would think that would push rates down temporary (you know, that whole supply and demand thing we all learned in microeconomic) and tempt firms to take look at moving into the city. It'll be interesting to see how this all shakes out in the next couple years.
Capitol Mall's top law firms on the move
Older buildings face vacancies once shiny new towers get built
Sacramento's second-largest law firm has focused its sights on new office space at 500 Capitol Mall.
If talks bear fruit, developers George and Angelo G. Tsakopoulos would get McDonough Holland & Allen PC as the first anchor tenant for their 24-story office tower, and the owners of the law firm's current home at 555 Capitol Mall would face a gaping hole in their lease portfolio by early 2009.
Downey Brand LLP already has signed as an anchor tenant in U.S. Bank Tower, under construction at 621 Capitol Mall. Sacramento's largest law firm expects to leave 555 Capitol Mall for its new headquarters across 6th Street in November 2008.
While Downey Brand is working to expand its lease in the new bank tower to five floors, another Top 10 Sacramento law firm is close to a deal for space there. Norm Hile, managing partner at Orrick Herrington & Sutcliffe, said the firm is "very far along with negotiations" for a lease at 621 Capitol, but "it's not definite."
This kind of movement is unprecedented among major law firms on Capitol Mall. Some say it indicates the legal market has matured enough that developers can hang ambitious projects and their financing on the strength of the legal shops.
"We're looking at significant anchor tenants for these two buildings," corporate real estate broker Chris Strain said. "Landlords and lenders have been hesitant to use professional services as anchor tenants in the past because they typically do not have a deep balance sheet. This shows you we have a healthy legal industry in Sacramento that reflects the expansive business environment."
It also reflects the near-term challenges facing downtown landlords as a big block of Class A space moves toward the market.
Big chunk of space
McDonough Holland & Allen's lease is up at 555 Capitol on May 31, 2009. The law firm sent out a request for proposals more than a year ago for 65,000 to 80,000 square feet of offices.
"Our focus is now on 500 Capitol Mall," executive director Gerry Holt said. "But we have not signed a lease yet or even begun formal negotiations."
Until that happens, firm executives have declined further comment.
"If we do sign them, they'll be our first significant tenant, and it would establish a name for the building that's recognizable," said Greg Levi, the leasing agent for 500 Capitol Mall. An 80,000-square-foot lease would fill about 18 percent of the 433,500 or so leasable square feet of offices planned for the tower.
"We don't have things finalized yet," Angelo G. Tsakopoulos said. "We've got some loose ends. But we're in discussions and should have something to report soon."
A stable, longtime law firm founded in Sacramento in 1953, McDonough Holland & Allen has more than 85 local attorneys and dozens of support staffers, making it a plum anchor tenant for any office building. It now leases about 68,000 square feet on the seventh, eighth and ninth floors of 555 Capitol Mall, or about 18 percent of the 376,000-square-foot total in that building.
"The $64,000 question," Strain said, is what happens to 555 Capitol Mall with so much vacant space? That would be almost 40 percent of the leasable offices at 555 Capitol.
The ownership group at 555 Capitol was unable to come to terms with McDonough Holland & Allen to extend the lease, said Claudette Russell, vice president of building operations.
"The negotiations broke down due to a difference of opinion (on) the rental rate," she wrote in an e-mail. "Plaza Five Fifty Five is asking $3.50 per square foot for the space that McDonough Holland & Allen will vacate."
Efforts to reach the building's owners were unsuccessful.
Another vacancy looms
Another high-rise on Capitol Mall could lose a solid law-firm tenant, too.
Orrick Herrington & Sutcliffe's lease at 400 Capitol Mall is up at the end of 2008. The firm is far into negotiations for space up the street in the U.S. Bank Tower.
"We are obviously spending time looking at our options," managing partner Hile said. "The folks at 621 (Capitol) have a very attractive proposal, but there's no final signed anything."
The Sacramento office of San Francisco-based Orrick Herrington has 29 lawyers, making it No. 8 on the Business Journal's list of top law firms in the region. The firm occupies the top floor -- the 30th -- of the Wells Fargo Building and about half the 29th floor.
Orrick Herrington needs more space and is still talking to the building owners about taking the rest of the 29th floor, Hile said. "But we are very far along with negotiations at 621 Capitol Mall," he added. "It's a beautiful and attractive space, much in our thoughts."
Downey Brand has exercised its option to take more space in the new bank tower, but the paperwork isn't finished yet, said Tom McCarthy, operations director for the firm.
The expanded lease would give the firm just over 100,000 square feet, up from 85,000 square feet in the initial deal signed two years ago; the higher figure would amount to almost 30 percent of the office space in the tower, which would have about 350,000 square feet to lease. It's enough room for about 160 offices, McCarthy said. The firm has about 105 in Sacramento now but wants room to grow.
While the number of new law firms coming to Sacramento continues to grow, the net number of lawyers in the area is not changing much as new high-rise office buildings come on line.
There are a total of 8,792 lawyers in the four-county area, according to the State Bar. That's up slightly more than 1 percent from 8,680 in 2006.
"They are leaving Peter to pay Paul," Strain said. "At the end of the day, we'll see vacancy rates on Capitol Mall of up to 20 percent, two or three years out."