Make the Most of Your Law Firm's Lease Expiration

However, the tide is turning. Jones Lang LaSalle (JLL) predicts that 2015 will be the first time in eight years that the majority of U.S. markets will move into “landlord-favorable” territory. In fact, in select markets such as Boston, New York City and Dallas, landlords already have the upper hand in lease negotiations. For quality space, there is even bleaker news for tenants: Law firm managing partners seeking impressive locations are currently grappling with a shortage of prestigious space in prominent buildings. This year, trophy space in key markets continued to command a 20% premium over other Class A space, a premium expected to rise as the economy improves. Additionally, the large spaces required by many law firms are becoming harder to find: Twenty cities with a high concentration of law firms have fewer than five blocks of space greater than 100,000 square feet available.

Key Strategies

As negotiations proceed over the next few years, many law firm partners will find themselves faced with spearheading a lease renegotiation, a move, or a consideration of multiple options. Below are some strategies that will help you ensure that you are drawing the most value from your next move or renovation ' and that the agreed lease terms set your firm up for success. We recommend you explore the following questions, both inside your firm and with your real estate advisers, before your next lease negotiation:

• What are real estate conditions today, and what are they predicted to be over the next few years, in the markets where we need to be located?
• Can we reduce office space strategically?
• What should we ask for when negotiating a new lease agreement?
• How can our space best support our brand and commitment to sustainability?

Information that comes to light as you explore these questions will help your firm to achieve the highest value, and terms most meaningful to your success, from your location decision to lease negotiation.

Knowing Your Markets

What are real estate conditions today, and what are they predicted to be over the next few years, in the markets where you need to be located? It is important to come to the negotiating table with an understanding of the conditions that are driving real estate demand in the markets important to your firm. Specifically, you need to know the average rent per square foot in your market and the going rate for tenant incentives (typically expressed as number of months in free rent and the amount the landlord will provide to renovate your space per square foot). The good news for law firms is that most U.S. markets are still favorable to tenants. But be aware that the window is closing, as mentioned above, and is already landlord-favorable in the top 10 markets for law firms as determined by the Jones Lang LaSalle's Law Firm Index

Take, for example, Washington DC, ranked first in the Law Firm Index due to its potential business growth, strong local legal employment volume and the availability of premium space at a discount. According to the report, it's an optimal time to act for DC-area tenants, despite the very recent market turn toward landlords. Concession packages remain elevated but simultaneously, quality space options are disappearing from the market, in part due to a slowdown in construction. Managing partners with D.C. offices are still expected to save an average of 6.5% by taking the time to negotiate on their next lease. Conversely, law firms in Northern California and parts of Texas don't have as much bargaining power because of the strong economic activity in the Class A office market overall from the technology and energy sectors.

According to the report, the top 10 markets for law firms, in order, are: Washington DC, Los Angeles, New York, Chicago, Dallas, Atlanta, Boston, Philadelphia, Houston and Minneapolis.

The Global Market

For multinational law firms that are looking to establish global offices, there is more quality space available. Anchor tenants in Europe, Asia and North Africa are more likely to be corporations, so law firm trends are not market-movers in quite the same way as they are in the U.S. Here, law firms lease, on average, more than 15% of Class A office space in urbanized markets. In contrast, only two cities outside North America show law firms leasing more than 10% of Class A office space in the central business district. The Jones Lang LaSalle report pinpoints two regions where strong economic growth is driving law firm office expansions: Africa and Asia Pacific. Similar to the JLL Americas report, the firm's Global report provides managing partners with a snapshot of real estate market conditions by major cities in Asia, Africa and Europe for benchmarking purposes.

Strategically Reducing Office Space

According to the Americas report, in 2012 law firms reduced their space requirements by an average of 15% through right-sizing workplace strategies that are not correlated with headcount reduction. The largest law firm spaces are no exception: In 2012, nearly one-third of all large (more than 50,000-square-foot) law firm leases involved right-sizing. Here are some of the common ways that managing partners are reducing the space required to effectively run the firm's office locations:

• Lower overall space needs by reducing the size of perimeter offices.
• Transform empty interior support spaces, document storage areas and secretarial carrels into flexible work spaces and associate offices.
• Move back-office operations and non-attorney functions into a secondary location still easily accessible, but less expensive to rent and operate than Class A or trophy space appropriate for client-facing activities.

Regarding the last point, large firms are able to relocate administrative support and back-office operations to areas of the country where the labor pool is strong, but significant cost-savings can be achieved through lower real estate and salary total costs ' and in some cases, through the availability of economic incentives.

A partial open-plan office design can be an effective strategy for a law firm undergoing right-sizing. Open office configurations for interior space, when executed in a way that supports the confidentiality required for many attorney functions, has the ability to foster increased collaboration and communication among colleagues. For example, a drive to right-size has seen many law firms grouping administrative assistants into teams; this has helped reduce the ratio of attorney to assistant from 3:1 down to 7:1 on average, resulting in payroll cost savings as well as reduced space requirements.

Negotiating a New Lease Agreement

While law firms are, by nature, adept at contract negotiation, to successfully negotiate a lease, a firm must understand what the market will offer before sitting down at the negotiation table. Know what's reasonable ' and familiarize yourself with what is possible, or you could leave valuable features on the table without realizing they were yours for the asking. Consider the following before agreeing to terms.

Landlord Concessions

Know what to expect. In addition to negotiating on rent per square foot, tenants are often able to gain other concessions including free rent and tenant improvement allowances. In 2012, landlords granted an average of eight months' free rent on a 10-year lease, and average tenant improvement allowances were $47 per square foot, but these can vary widely by city. So be sure to check the going rate in your location. A tenant improvement allowance from the landlord provides law firms with cash-in-hand to perform a build-out (a complete office space reconfiguration) or renovate the space. Understanding what your ideal office space configuration will be in advance is critical to knowing what you'll need to spend on interior construction, so it is prudent to work with a design and construction team in advance of your lease negotiations.

Lease Term Advantages and Disadvantages

Tenants have the best negotiating power the longer the lease period ' which for law firms is typically 10 years. Conversely, a shorter lease provides law firms with more flexibility, particularly important for entrepreneurial firms, or firms opening offices in new locations that may experience rapid growth in the short term. Flexibility is important in all lease negotiations, particularly long-term leases. In addition to allowing for growth, many firms are deploying mobility and technology programs that may make it possible to reduce space ' and thus cost ' over time.

Insurance Matters

Hurricane Sandy called business interruption insurance to the forefront, as it covers the rent on uninhabitable space. We recommend that law firm partners work closely with insurance advisers at the time of any lease negotiation to ensure that insurance policies are aligned with the new contract, particularly if the firm is moving into new space. Insurance advisers will be able to cite specific policy features that may help avoid future potential liabilities.

Your Space, Your Brand and Your Commitment to Sustainability

Like marketing initiatives, your office space needs to communicate your firm's brand identity to customers and employees alike. However, there are trade-offs, e.g., a penthouse in a trophy building is a proxy for a “top-tier” law firm, but it comes at a steep price. Similarly, law firms with price-sensitive clients may prefer to rent a lower floor of a non-trophy Class A or A- building in order to avoid the perception that they are spending in excess. The same rationale should be applied to designing your interior space. No matter whether your partners envision a trophy or more conservative space, a configuration that prioritizes employee productivity ' and flexibility as the firm grows ' is significant.

Studies show that greener offices can help improve worker satisfaction, cut operational costs ' and even reduce sick days. For law firms that own their building, environmental improvements may include upgrading your HVAC (heating, ventilation, and air conditioning) system, and replacing windows for better insulation. For the vast majority of law firms that lease space (rather than owning a building), the ability to “go green” may appear limited as it's the landlord's decision to pay for these capital improvements. The good news, however, is that landlords may be willing to negotiate and contribute, and there are ways to leverage your lease negotiation milestone to further sustainability commitments, even if you can't change the entire building.

Landlords recognize that it may be less disruptive to pay for green upgrades than to see a long-term tenant move out of the building for “greener” pastures, so to speak. And base building upgrades that help reduce the carbon footprint may also be a selling point for future tenants elsewhere in the building. Most importantly, while initial costs are high, an energy-efficient building will reap long-term savings on utility costs. To meet property ownership halfway, some law firms have negotiated utility cost sharing with their landlords, in which they share both costs and savings. Law firms can be pretty creative when it comes to outfitting their space in an environmental manner. For example, while it may be tempting to buy everything new for your next office space, sometimes the greenest thing you can do is let items such as furniture reach the end of their lifecycles before replacing them.

When the Ink Has Dried

When all is said and done, law firms can achieve significant reductions on rent, space and energy use by being armed with benchmarking data and right-sizing workplace strategies. However, the work doesn't end there. A comprehensive lease agreement is required to ensure that the space meets the operational needs of your firm. These operational needs include a space that spurs productivity among professionals and support staff, a space and location that reflects the firm's brand identity, and the flexibility from landlords to reconfigure, augment or downsize space as business conditions permit.

Like any contract negotiation, knowing what you want before you begin the conversation will go a long way toward a successful outcome. Law firms can leverage the important milestone of a lease renewal or move opportunity in order to reduce cost, drive productivity and improve employee morale. Asking the right questions before you negotiate your new lease terms can make all the difference.

Elizabeth Cooper and Tom Doughty are International Directors and Co-chairs of Jones Lang LaSalle's law firm practice, based in Washington, DC.

Lease expirations and other anticipated firm moves represent milestones offering significant opportunity to boost productivity, drive cost and energy use reductions, and improve workforce morale. But as any veteran law firm partner will tell you, lease negotiations and the resulting renovations or moves also represent a highly sensitive management issue. To be successful, focus on drawing the most value from your firm's lease expiration ' whether you decide to make a move, transform your existing space, or simply negotiate advantageously without major change.

What Time Is a Good Time?

The next few years remain a good time to consider a move. It will come as no surprise that since the onset of the recession, law firms have been in the driver's seat when leasing office space. In fact, as the Jones Lang LaSalle's Law Firm Office Perspective Report reveals, law firms have been able to take advantage of a historically tenant-favorable market with average rents discounted by 10% to 20% from the peak in 2007. See www.us.am.joneslanglasalle.com/ResearchLevel1/2012Law_Firm_office_Perspective.pdf.

However, the tide is turning. Jones Lang LaSalle (JLL) predicts that 2015 will be the first time in eight years that the majority of U.S. markets will move into “landlord-favorable” territory. In fact, in select markets such as Boston, New York City and Dallas, landlords already have the upper hand in lease negotiations. For quality space, there is even bleaker news for tenants: Law firm managing partners seeking impressive locations are currently grappling with a shortage of prestigious space in prominent buildings. This year, trophy space in key markets continued to command a 20% premium over other Class A space, a premium expected to rise as the economy improves. Additionally, the large spaces required by many law firms are becoming harder to find: Twenty cities with a high concentration of law firms have fewer than five blocks of space greater than 100,000 square feet available.

Key Strategies

As negotiations proceed over the next few years, many law firm partners will find themselves faced with spearheading a lease renegotiation, a move, or a consideration of multiple options. Below are some strategies that will help you ensure that you are drawing the most value from your next move or renovation ' and that the agreed lease terms set your firm up for success. We recommend you explore the following questions, both inside your firm and with your real estate advisers, before your next lease negotiation:

• What are real estate conditions today, and what are they predicted to be over the next few years, in the markets where we need to be located?
• Can we reduce office space strategically?
• What should we ask for when negotiating a new lease agreement?
• How can our space best support our brand and commitment to sustainability?

Information that comes to light as you explore these questions will help your firm to achieve the highest value, and terms most meaningful to your success, from your location decision to lease negotiation.

Knowing Your Markets

What are real estate conditions today, and what are they predicted to be over the next few years, in the markets where you need to be located? It is important to come to the negotiating table with an understanding of the conditions that are driving real estate demand in the markets important to your firm. Specifically, you need to know the average rent per square foot in your market and the going rate for tenant incentives (typically expressed as number of months in free rent and the amount the landlord will provide to renovate your space per square foot). The good news for law firms is that most U.S. markets are still favorable to tenants. But be aware that the window is closing, as mentioned above, and is already landlord-favorable in the top 10 markets for law firms as determined by the Jones Lang LaSalle's Law Firm Index

Take, for example, Washington DC, ranked first in the Law Firm Index due to its potential business growth, strong local legal employment volume and the availability of premium space at a discount. According to the report, it's an optimal time to act for DC-area tenants, despite the very recent market turn toward landlords. Concession packages remain elevated but simultaneously, quality space options are disappearing from the market, in part due to a slowdown in construction. Managing partners with D.C. offices are still expected to save an average of 6.5% by taking the time to negotiate on their next lease. Conversely, law firms in Northern California and parts of Texas don't have as much bargaining power because of the strong economic activity in the Class A office market overall from the technology and energy sectors.

According to the report, the top 10 markets for law firms, in order, are: Washington DC, Los Angeles, New York, Chicago, Dallas, Atlanta, Boston, Philadelphia, Houston and Minneapolis.

The Global Market

For multinational law firms that are looking to establish global offices, there is more quality space available. Anchor tenants in Europe, Asia and North Africa are more likely to be corporations, so law firm trends are not market-movers in quite the same way as they are in the U.S. Here, law firms lease, on average, more than 15% of Class A office space in urbanized markets. In contrast, only two cities outside North America show law firms leasing more than 10% of Class A office space in the central business district. The Jones Lang LaSalle report pinpoints two regions where strong economic growth is driving law firm office expansions: Africa and Asia Pacific. Similar to the JLL Americas report, the firm's Global report provides managing partners with a snapshot of real estate market conditions by major cities in Asia, Africa and Europe for benchmarking purposes.

Strategically Reducing Office Space

According to the Americas report, in 2012 law firms reduced their space requirements by an average of 15% through right-sizing workplace strategies that are not correlated with headcount reduction. The largest law firm spaces are no exception: In 2012, nearly one-third of all large (more than 50,000-square-foot) law firm leases involved right-sizing. Here are some of the common ways that managing partners are reducing the space required to effectively run the firm's office locations:

• Lower overall space needs by reducing the size of perimeter offices.
• Transform empty interior support spaces, document storage areas and secretarial carrels into flexible work spaces and associate offices.
• Move back-office operations and non-attorney functions into a secondary location still easily accessible, but less expensive to rent and operate than Class A or trophy space appropriate for client-facing activities.

Regarding the last point, large firms are able to relocate administrative support and back-office operations to areas of the country where the labor pool is strong, but significant cost-savings can be achieved through lower real estate and salary total costs ' and in some cases, through the availability of economic incentives.

A partial open-plan office design can be an effective strategy for a law firm undergoing right-sizing. Open office configurations for interior space, when executed in a way that supports the confidentiality required for many attorney functions, has the ability to foster increased collaboration and communication among colleagues. For example, a drive to right-size has seen many law firms grouping administrative assistants into teams; this has helped reduce the ratio of attorney to assistant from 3:1 down to 7:1 on average, resulting in payroll cost savings as well as reduced space requirements.

Negotiating a New Lease Agreement

While law firms are, by nature, adept at contract negotiation, to successfully negotiate a lease, a firm must understand what the market will offer before sitting down at the negotiation table. Know what's reasonable ' and familiarize yourself with what is possible, or you could leave valuable features on the table without realizing they were yours for the asking. Consider the following before agreeing to terms.

Landlord Concessions

Know what to expect. In addition to negotiating on rent per square foot, tenants are often able to gain other concessions including free rent and tenant improvement allowances. In 2012, landlords granted an average of eight months' free rent on a 10-year lease, and average tenant improvement allowances were $47 per square foot, but these can vary widely by city. So be sure to check the going rate in your location. A tenant improvement allowance from the landlord provides law firms with cash-in-hand to perform a build-out (a complete office space reconfiguration) or renovate the space. Understanding what your ideal office space configuration will be in advance is critical to knowing what you'll need to spend on interior construction, so it is prudent to work with a design and construction team in advance of your lease negotiations.

Lease Term Advantages and Disadvantages

Tenants have the best negotiating power the longer the lease period ' which for law firms is typically 10 years. Conversely, a shorter lease provides law firms with more flexibility, particularly important for entrepreneurial firms, or firms opening offices in new locations that may experience rapid growth in the short term. Flexibility is important in all lease negotiations, particularly long-term leases. In addition to allowing for growth, many firms are deploying mobility and technology programs that may make it possible to reduce space ' and thus cost ' over time.

Insurance Matters

Hurricane Sandy called business interruption insurance to the forefront, as it covers the rent on uninhabitable space. We recommend that law firm partners work closely with insurance advisers at the time of any lease negotiation to ensure that insurance policies are aligned with the new contract, particularly if the firm is moving into new space. Insurance advisers will be able to cite specific policy features that may help avoid future potential liabilities.

Your Space, Your Brand and Your Commitment to Sustainability

Like marketing initiatives, your office space needs to communicate your firm's brand identity to customers and employees alike. However, there are trade-offs, e.g., a penthouse in a trophy building is a proxy for a “top-tier” law firm, but it comes at a steep price. Similarly, law firms with price-sensitive clients may prefer to rent a lower floor of a non-trophy Class A or A- building in order to avoid the perception that they are spending in excess. The same rationale should be applied to designing your interior space. No matter whether your partners envision a trophy or more conservative space, a configuration that prioritizes employee productivity ' and flexibility as the firm grows ' is significant.

Studies show that greener offices can help improve worker satisfaction, cut operational costs ' and even reduce sick days. For law firms that own their building, environmental improvements may include upgrading your HVAC (heating, ventilation, and air conditioning) system, and replacing windows for better insulation. For the vast majority of law firms that lease space (rather than owning a building), the ability to “go green” may appear limited as it's the landlord's decision to pay for these capital improvements. The good news, however, is that landlords may be willing to negotiate and contribute, and there are ways to leverage your lease negotiation milestone to further sustainability commitments, even if you can't change the entire building.

Landlords recognize that it may be less disruptive to pay for green upgrades than to see a long-term tenant move out of the building for “greener” pastures, so to speak. And base building upgrades that help reduce the carbon footprint may also be a selling point for future tenants elsewhere in the building. Most importantly, while initial costs are high, an energy-efficient building will reap long-term savings on utility costs. To meet property ownership halfway, some law firms have negotiated utility cost sharing with their landlords, in which they share both costs and savings. Law firms can be pretty creative when it comes to outfitting their space in an environmental manner. For example, while it may be tempting to buy everything new for your next office space, sometimes the greenest thing you can do is let items such as furniture reach the end of their lifecycles before replacing them.

When the Ink Has Dried

When all is said and done, law firms can achieve significant reductions on rent, space and energy use by being armed with benchmarking data and right-sizing workplace strategies. However, the work doesn't end there. A comprehensive lease agreement is required to ensure that the space meets the operational needs of your firm. These operational needs include a space that spurs productivity among professionals and support staff, a space and location that reflects the firm's brand identity, and the flexibility from landlords to reconfigure, augment or downsize space as business conditions permit.

Like any contract negotiation, knowing what you want before you begin the conversation will go a long way toward a successful outcome. Law firms can leverage the important milestone of a lease renewal or move opportunity in order to reduce cost, drive productivity and improve employee morale. Asking the right questions before you negotiate your new lease terms can make all the difference.

Elizabeth Cooper and Tom Doughty are International Directors and Co-chairs of Jones Lang LaSalle's law firm practice, based in Washington, DC.