Office Space

Law firms have long dominated downtown trophy office space, locating in buildings that are the best-of-the-best at “Main and Main.” But times are changing. While growth is slowly returning to the legal industry, slightly rising revenues are still no match for rapidly increasing office space rents. New solutions ' and new locations ' must be found.

As a result, some firms are locating offices outside the central business districts according to this year's annual Law Firm Perspective, a report from global real estate firm JLL. This trend offers an elegant solution for partners addressing seemingly conflicting challenges: the need to cut costs to keep operations focused on efficiency and productivity; and, the need to invest in offices that support innovation and competition for talent and clients.

Here, Elizabeth Cooper and Tom Doughty, co-chairs of JLL's law firm practice, discuss the latest property trends and real estate strategies law firms should consider.

Q. As the legal market eyes growth, are you seeing firms rethink their space needs again?

A. Globally, revenues for the top firms are on the rise, but expense growth is still increasing, according to the latest AmLaw 100 results. This means that partners are approaching growth of their real estate footprint cautiously.

Real estate is typically the second largest cost item for law firms, and after the last few years of cost-cutting, most firms don't have much more room left to cut the fat. Our research shows that 55% to 90% of law firms in most major markets are saying they have already implemented substantial efficiency measures in new or restructured leases. In Washington, DC, for example, one of the more tenant-favorable office markets in the country, law firms have shed as much as 20% to 30% of their property footprint as they enter into new leases. With nothing more to cut in traditional locations, office moves are now allowing many firms to get creative and look at how to put more attorneys in the same or less space.

Q. What can firms expect to see in the real estate market over the next year?

A. Costs are rising, so creativity is necessary to control the overall spend on real estate. The leasing environment in most U.S. and North American cities is growing exceedingly tougher, with 77% of markets expecting rents to continue to rise over the next year. Law firms are paying an average of 3.3% more than last year, with an 18.1% premium for prime “trophy” space in the heart of the city. Rates are rising at more than double that rate in some of the biggest markets like Boston, Houston and San Francisco.

It's not just that costs are rising; it's becoming more difficult to secure an ideal location. Premium space is becoming more and more difficult to find, particularly in central business districts, giving landlords the upper hand. In 2015, two-thirds (66%) of the 35 U.S. markets we track will have a real estate environment that is more favorable to landlords; that means fewer concessions for tenants, and less choice.

In other parts of the globe, a similar story is playing out, but there are areas of opportunity. In Europe and the Middle East, 56% of the markets expect rising real estate costs in 2015. Asia Pacific is experiencing more fluctuations across regions; 43% of markets forecast rent growth this year; on the other hand, there are some markets, notably in Australia, where many expect to see prices fall. Overall, only 15% of markets expect to see landlord concessions increase in the form of rental abatement or tenant improvement allowances.

Q. Where are the hot growth cities for law firms?

A. Firms tend to follow the big growth industries ' tech, energy and life sciences. Take Silicon Valley as an example. Law firms are competing against venture capital and private equity firms, as well as growing tech firms, to nab quality office space in central Palo Alto. There has been very little turnover with office space over the last two years, and more than 60% of new development in downtown Palo Alto has already been preleased. Some are eyeing nearby Menlo Park as a more affordable option, but are waiting for construction of new office developments to be completed.

Like tech in Silicon Valley, the domestic oil and gas boom is driving law firm growth in Texas. Dallas is a hot market for law firms with oil industry clients ' a growing breed. Several national law firms have opened offices recently, including McGuire Woods, Holland & Knight and Schiff Hardin. Over the last several years, law firms, already staples in the Dallas law community, have also taken over larger blocks of space in the city, and the same is happening in Houston and Fort Worth. In Dallas, currently, 31 firms are using more than 50,000 square feet of office space, compared with 22 firms in 2011.

Boston's legal community can thank the biotech and life sciences industries for its higher rents and high competition for trophy spaces. That market is seeing growth in intellectual property and corporate law practices gravitating toward the Seaport District, dubbed the Innovation District. That submarket is a draw for firms that want to be closer to both high-tech startups and pharma giants like Vertex. For example, law firm Goodwin Procter is moving its office from the Financial District in Boston to a smaller but more efficient block of space at Fan Pier.

Globally, we've seen a number of London-based firms like Allen & Overy and Linklaters make aggressive pushes into the U.S.; likewise, major players in the U.S., like Akin Gump and Sutherland, have been expanding in Europe as well. For firms that see scale and geographic presence as key differentiators, there is a growing appetite to enter emerging markets in Africa, Asia and Latin America.

Q. In the U.S., what kind of alternative locations are attracting law firms and why?

A. Rising rents and fewer options are chasing firms from Central Business Districts (CBDs), but these aren't the only reasons. On a happier note, firms are also finding advantages in physically positioning themselves in the heart of the industry sector they are targeting, which may fall slightly off the beaten path ' such as Boston's Innovation District.

Talent is another influencing factor for location. Hiring has picked up for law firms recently, especially among candidates with three to seven years of experience who can “hit the ground running,” according to legal staffing firm Robert Half Legal. Increasingly, young attorneys are choosing to live in close-in urban residential neighborhoods popular among young professionals such as Chicago's River West, the Mount Vernon Triangle in Washington, DC, and Denver's LoDo district. In New York, law firms shifting their office searches to Midtown West and downtown, including new developments in the Hudson Yards neighborhood, are finding that many of their young professionals live in neighborhoods that are contiguous to these areas.

Q. What other strategies are law firms using to reign in real estate costs?

A. The economic environment today requires that firms be more nimble ' revenues are more volatile than ever before, so the recent uptick in growth is not fully trusted by managing partners committing to leases. We've seen more firms shuffling around staff over the last few years, so that the prime locales are reserved more for the revenue-generating attorneys. In larger firms, administrative functions are being moved to less expensive buildings on the perimeter of the city, or sometimes to secondary markets. For example, White & Case recently shifted a substantial part of its non-revenue functions to Tampa, FL. Firms are also shifting more of their contract attorney work to lower-cost cities. Pillsbury downsized its space in DC, moving part of its contract attorney work and other lower-revenue functions to Nashville, TN.

Some firms are looking more creatively at how they use their space, particularly when there is unneeded space still under a lease commitment. In Chicago, Foley & Lardner is providing 12,000 square feet of working space and pro-bono office hours for a digital co-working community in Chicago's River West area, potentially nurturing new clients and revenue for the firm.

Q. How are you seeing law firms connect their office space to a growth strategy, aside from the obvious factor of location?

A. Firms are taking a hard look at their cultures, and in doing so, evaluating how the space they design for workers plays into that. We're seeing more firms reshape space to encourage more collaboration and interaction within the office, such as having high-quality dining facilities serve a dual purpose as a formal or informal meeting place with clients and colleagues. Work hubs and lounge areas are increasing in number to encourage interactions with colleagues and boost productivity. However, there still must be plenty of quiet space where attorneys can hold confidential meetings and perform solo work. More than half of U.S. markets report that law firms retain traditional offices for partners as well as associates, but even so, we're seeing new build-outs incorporating more open areas, interior glass-fronted offices and multipurpose collaborative spaces.

Q. Given market conditions, what kind of negotiation strategies would you suggest for firms facing lease expirations in the U.S.?

A. Timing is everything. It's a tough negotiating environment right now, especially since most of the new construction won't be available for at least another 24 to 36 months, and landlords have the upper hand in most markets. It's best to check with a real estate adviser about the specific dynamics that are taking hold in a particular market, and even a specific submarket. Generally speaking, firms should start discussions years before their leases expire, as early preparation for lease negotiations is always advantageous. This is especially true if new construction is a consideration. If a firm can anchor a new building, that can be a negotiating advantage in an otherwise tight market. Firms should also consider flexibility in their lease with respect to length of term, options to expand and contract, and early termination or short-term permitted holdover.

Choosing law firm office space has become a more multidimensional decision than it used to be. There are more options as firms consider new neighborhoods, and while rents are high, creativity can still help keep overall costs down.

Elizabeth Cooper and Tom Doughty are International Directors and Law Firm Group Co-leads for JLL, resident in the firm's Washington, DC, office. Reach them at [email protected] and [email protected].

Law firms have long dominated downtown trophy office space, locating in buildings that are the best-of-the-best at “Main and Main.” But times are changing. While growth is slowly returning to the legal industry, slightly rising revenues are still no match for rapidly increasing office space rents. New solutions ' and new locations ' must be found.

As a result, some firms are locating offices outside the central business districts according to this year's annual Law Firm Perspective, a report from global real estate firm JLL. This trend offers an elegant solution for partners addressing seemingly conflicting challenges: the need to cut costs to keep operations focused on efficiency and productivity; and, the need to invest in offices that support innovation and competition for talent and clients.

Here, Elizabeth Cooper and Tom Doughty, co-chairs of JLL's law firm practice, discuss the latest property trends and real estate strategies law firms should consider.

Q. As the legal market eyes growth, are you seeing firms rethink their space needs again?

A. Globally, revenues for the top firms are on the rise, but expense growth is still increasing, according to the latest AmLaw 100 results. This means that partners are approaching growth of their real estate footprint cautiously.

Real estate is typically the second largest cost item for law firms, and after the last few years of cost-cutting, most firms don't have much more room left to cut the fat. Our research shows that 55% to 90% of law firms in most major markets are saying they have already implemented substantial efficiency measures in new or restructured leases. In Washington, DC, for example, one of the more tenant-favorable office markets in the country, law firms have shed as much as 20% to 30% of their property footprint as they enter into new leases. With nothing more to cut in traditional locations, office moves are now allowing many firms to get creative and look at how to put more attorneys in the same or less space.

Q. What can firms expect to see in the real estate market over the next year?

A. Costs are rising, so creativity is necessary to control the overall spend on real estate. The leasing environment in most U.S. and North American cities is growing exceedingly tougher, with 77% of markets expecting rents to continue to rise over the next year. Law firms are paying an average of 3.3% more than last year, with an 18.1% premium for prime “trophy” space in the heart of the city. Rates are rising at more than double that rate in some of the biggest markets like Boston, Houston and San Francisco.

It's not just that costs are rising; it's becoming more difficult to secure an ideal location. Premium space is becoming more and more difficult to find, particularly in central business districts, giving landlords the upper hand. In 2015, two-thirds (66%) of the 35 U.S. markets we track will have a real estate environment that is more favorable to landlords; that means fewer concessions for tenants, and less choice.

In other parts of the globe, a similar story is playing out, but there are areas of opportunity. In Europe and the Middle East, 56% of the markets expect rising real estate costs in 2015. Asia Pacific is experiencing more fluctuations across regions; 43% of markets forecast rent growth this year; on the other hand, there are some markets, notably in Australia, where many expect to see prices fall. Overall, only 15% of markets expect to see landlord concessions increase in the form of rental abatement or tenant improvement allowances.

Q. Where are the hot growth cities for law firms?

A. Firms tend to follow the big growth industries ' tech, energy and life sciences. Take Silicon Valley as an example. Law firms are competing against venture capital and private equity firms, as well as growing tech firms, to nab quality office space in central Palo Alto. There has been very little turnover with office space over the last two years, and more than 60% of new development in downtown Palo Alto has already been preleased. Some are eyeing nearby Menlo Park as a more affordable option, but are waiting for construction of new office developments to be completed.

Like tech in Silicon Valley, the domestic oil and gas boom is driving law firm growth in Texas. Dallas is a hot market for law firms with oil industry clients ' a growing breed. Several national law firms have opened offices recently, including McGuire Woods, Holland & Knight and Schiff Hardin. Over the last several years, law firms, already staples in the Dallas law community, have also taken over larger blocks of space in the city, and the same is happening in Houston and Fort Worth. In Dallas, currently, 31 firms are using more than 50,000 square feet of office space, compared with 22 firms in 2011.

Boston's legal community can thank the biotech and life sciences industries for its higher rents and high competition for trophy spaces. That market is seeing growth in intellectual property and corporate law practices gravitating toward the Seaport District, dubbed the Innovation District. That submarket is a draw for firms that want to be closer to both high-tech startups and pharma giants like Vertex. For example, law firm Goodwin Procter is moving its office from the Financial District in Boston to a smaller but more efficient block of space at Fan Pier.

Globally, we've seen a number of London-based firms like Allen & Overy and Linklaters make aggressive pushes into the U.S.; likewise, major players in the U.S., like Akin Gump and Sutherland, have been expanding in Europe as well. For firms that see scale and geographic presence as key differentiators, there is a growing appetite to enter emerging markets in Africa, Asia and Latin America.

Q. In the U.S., what kind of alternative locations are attracting law firms and why?

A. Rising rents and fewer options are chasing firms from Central Business Districts (CBDs), but these aren't the only reasons. On a happier note, firms are also finding advantages in physically positioning themselves in the heart of the industry sector they are targeting, which may fall slightly off the beaten path ' such as Boston's Innovation District.

Talent is another influencing factor for location. Hiring has picked up for law firms recently, especially among candidates with three to seven years of experience who can “hit the ground running,” according to legal staffing firm Robert Half Legal. Increasingly, young attorneys are choosing to live in close-in urban residential neighborhoods popular among young professionals such as Chicago's River West, the Mount Vernon Triangle in Washington, DC, and Denver's LoDo district. In New York, law firms shifting their office searches to Midtown West and downtown, including new developments in the Hudson Yards neighborhood, are finding that many of their young professionals live in neighborhoods that are contiguous to these areas.

Q. What other strategies are law firms using to reign in real estate costs?

A. The economic environment today requires that firms be more nimble ' revenues are more volatile than ever before, so the recent uptick in growth is not fully trusted by managing partners committing to leases. We've seen more firms shuffling around staff over the last few years, so that the prime locales are reserved more for the revenue-generating attorneys. In larger firms, administrative functions are being moved to less expensive buildings on the perimeter of the city, or sometimes to secondary markets. For example, White & Case recently shifted a substantial part of its non-revenue functions to Tampa, FL. Firms are also shifting more of their contract attorney work to lower-cost cities. Pillsbury downsized its space in DC, moving part of its contract attorney work and other lower-revenue functions to Nashville, TN.

Some firms are looking more creatively at how they use their space, particularly when there is unneeded space still under a lease commitment. In Chicago, Foley & Lardner is providing 12,000 square feet of working space and pro-bono office hours for a digital co-working community in Chicago's River West area, potentially nurturing new clients and revenue for the firm.

Q. How are you seeing law firms connect their office space to a growth strategy, aside from the obvious factor of location?

A. Firms are taking a hard look at their cultures, and in doing so, evaluating how the space they design for workers plays into that. We're seeing more firms reshape space to encourage more collaboration and interaction within the office, such as having high-quality dining facilities serve a dual purpose as a formal or informal meeting place with clients and colleagues. Work hubs and lounge areas are increasing in number to encourage interactions with colleagues and boost productivity. However, there still must be plenty of quiet space where attorneys can hold confidential meetings and perform solo work. More than half of U.S. markets report that law firms retain traditional offices for partners as well as associates, but even so, we're seeing new build-outs incorporating more open areas, interior glass-fronted offices and multipurpose collaborative spaces.

Q. Given market conditions, what kind of negotiation strategies would you suggest for firms facing lease expirations in the U.S.?

A. Timing is everything. It's a tough negotiating environment right now, especially since most of the new construction won't be available for at least another 24 to 36 months, and landlords have the upper hand in most markets. It's best to check with a real estate adviser about the specific dynamics that are taking hold in a particular market, and even a specific submarket. Generally speaking, firms should start discussions years before their leases expire, as early preparation for lease negotiations is always advantageous. This is especially true if new construction is a consideration. If a firm can anchor a new building, that can be a negotiating advantage in an otherwise tight market. Firms should also consider flexibility in their lease with respect to length of term, options to expand and contract, and early termination or short-term permitted holdover.

Choosing law firm office space has become a more multidimensional decision than it used to be. There are more options as firms consider new neighborhoods, and while rents are high, creativity can still help keep overall costs down.

Elizabeth Cooper and Tom Doughty are International Directors and Law Firm Group Co-leads for JLL, resident in the firm's Washington, DC, office. Reach them at [email protected] and [email protected].