Law Firm Leasing Drops During COVID-19

The drop in leasing activity has been remarkable. Looking at all large law firm lease deals over 30,000 square feet in New York, there were five leases signed in the first four months of 2019, compared with only one signed (a sublease) in 2020, says Nancy Muscatello, a managing consultant at CoStar Group, which tracks real estate activity. Overall, office leasing activity, in expansion or relocation, is down 50% nationally in the first four months of 2020, she says.

"We have an absolute slowdown on real estate transactions," says Sherry Cushman, a vice chairwoman at Cushman & Wakefield who advises law firm clients. Law firms "are either putting them on hold, if they can buy time," or renewing leases by one to three years to determine the long-term pandemic impact, Cushman says, noting that's a reversal from last year, when more than half of law firm leasing transactions were relocations.

Some big firms have already put off leasing decisions. For instance, Allen & Overy, which was reportedly close to signing a lease at Tishman Speyer's 630 Fifth Ave., instead agreed to a five-year extension to its current lease on its New York base at 1221 Avenue of the Americas.

Peck says he's aware of at least five or six other firms that are considering or have already executed one- or two-year extensions since the pandemic started.

While they are holding off on moves, some firms are negotiating with landlords for rent relief for several months to preserve cash flow now, Cushman says. In some cases, firms are offering to pay landlords at year-end when they have higher collections. The situation varies by the firm and by the market, she adds.

And many law firms are contemplating subleasing some of their space because they want to shed extra square footage.

Cushman anticipates that law firms, in the next few years, will execute more renewals and many firms will shed space because the "new workplace model" will be less office-centered, with a select group of employees home permanently or on a flex-time schedule. "We are anticipating that come 2021 and 2022, when law firms have a better sense of what their people will do, we will see more renewals, restructuring and give back of space," Cushman says.

Some firms, according to Cushman, are also considering satellite offices in suburban markets, outside the core offices in larger cities.

Phased Office Return

While they have held off on leasing decisions, tenant law firms are now focused on the safety of their current law firm space, Peck says.

Peck says Savills is advising more than 50 law firms in Manhattan on changes to their office space, speaking with law firm leaders about "what it's going to look like … so that your staff and partners feel comfortable."

Firms have formed committees to handle back-to-office procedures and have hired consultants, including real estate advisers such as Savills and Cushman. Many firms are considering staggering their reopening, with only a portion of people coming back at first.

Based on local and state laws and market conditions, Cushman anticipates that law firms will begin with about 20% to 25% of the workforce returning to an office and phasing in the remainder through the end of the year.

"Each firm is evaluating who those 25% will be," she says, noting that even if they make a decision that "it will be XYZ people, that doesn't mean that all those people will willfully return."

Because the legal sector occupies so much space, it has an easier transition, Cushman says. Law firms have traditionally operated with 300 to 400 square feet per employee, while most sectors have adapted to under 150 square feet for employees, she says.

"Law firms that were resilient to the densification trends are now in a better place" than others, Peck says, because they still kept private offices along the perimeter.

But while Big Law offices can transition faster, Cushman says, law firms will still be one of the slowest sectors to fully return to the office. Many law firms are located in so-called vertical markets — with high rises and a reliance on public transportation — raising particular health concerns.

Redesigning the Office

With attorney offices around the perimeter, only certain areas in law firm offices will have to be completely redesigned, real estate advisers say. In many cases, the adaptions will mean new furnishing solutions and new protocols.

"It's less about moving walls," Peck says, noting the changes may entail new cleaning procedures, UV lighting, air filtration, protocol around the building entrance and behavior changes such as preventing surface touching.

And many of the larger firms that shifted to create more open collaborative areas "will have to rethink, like the rest of New York City, what to do with open space," Peck says.

Some firms are also considering hiring their own staff to clean more extensively and reopening offices without any food or drink — not even coffee — to prevent crowding or surfacing touching, Cushman says.

Real estate advisers have designed diagrams that tenants could use to implement the six-foot rule in conference areas and open plan work stations. Some groups, such as the New York State Bar Association, have already outlined guidance on how firms can safely arrange offices.

"We've seen clients physically take away chairs," says Katrina Kostic Samen, who is head of workplace strategy and design at KKS Savills, adding there's also renewed interest in installing doors that automatically open and close, as well as wearable sensors that may warn if someone comes close.

Meanwhile, firms will need to work with the landlord to understand the safety of the elevators, restrooms, staircases and signage, Kostic Samen notes. "The whole property management aspect of a building is going to be pushed front and center. Your property manager, your building manager is going to be your best friend … who reassures you the space is clean, it's sanitized, six feet apart," she says.

With all the social distancing changes in place, it's natural to ask: What's the point of returning to the office if law firms eliminate close collaboration and everyone works in their own private space?

"The concern is that the longer people are away, and if more people don't fully return, then their firm culture could be diminished," Cushman says. "Part of the evaluation of the return to the workplace will be the impact on firm culture."

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Christine Simmons writes about the New York legal community and the business of law for ALM. She can be reached at [email protected] and on Twitter @chlsimmons.