• Law Firms Are Dumping a Significant Amount of Office Space

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    Law Firms Are Dumping a Significant Amount of Office Space

     
    The prevalence of remote working under COVID-19 and expected layoffs are leading law firms to downsize their real estate.

    In 2019, law firms accounted for 5.9 percent of all office leases signed in the U.S., according to real estate services firm CBRE. In markets like Manhattan, they ranked fifth from the top for the largest office leases signed that year, with 819,735 sq. ft. of space. The pandemic has boosted business at many law firms. But it also initiated a long-overdue correction to law firm operations, forcing a focus on efficiencies and the ongoing success of the firms, according to Sherry Cushman, vice chair of the legal sector advisory group with real estate services firm Cushman & Wakefield. That might spell trouble for office landlords.

    In the mist of the pandemic, the most notable operational change for law firms has been a reduction in office space in anticipation of attorneys continuing to work from home offices even after COVID-19 stops being a primary consideration.

    Law firms began downsizing their office spaces over a decade ago when digital law libraries replaced physical ones and client perceptions of large, lavish offices shifted from a show of strength and success to an exorbitant cost, notes Cushman. The space allocated per attorney was reduced from 1,200—1,400 sq. ft. to about 700 sq. ft.—with future target ratios due to COVID-19 at less than 400 sq. ft. per attorney. 

    Part of the shift came with the entrance of the millennial generation into the workforce. The focus on technology and collaboration became priorities and law firm offices became denser as they began implementing open office configurations and strategies such as hoteling and unassigned seating.

    Cushman says that the average space occupied by law firms that moved to new digs in 2018 and 2019 was reduced by 29 percent, and those renewing leases reduced their space by 19 percent. That was also a period of flight to quality because firms moving to new, class-A space at locations like Hudson Yards in Midtown Manhattan saved on rent by reducing the amount of space occupied per attorney to offset higher rental rates.

    “Since then there has been a drastic change in planning for the future,” she says. Her group’s 2020 National Legal Sector Benchmark Survey—Bright Insight, which included 608 law firms and associate participants, highlights sudden, forced changes law firms are undergoing as a result of the pandemic. Some of these changes are expected to have long-term effects or will accelerate trends that were already underway before the arrival of COVID-19.“Then COVID-19 hit and everything was out the window,” Cushman continues, noting that the first couple of months of working from home was “uncomfortable” for many attorneys. Then came a turning point at roughly three months into the pandemic when both employees and clients became more comfortable with the new work arrangement.

    The immediate impacts of the pandemic on law firms involved lease transactions; staff reductions; and evaluation of staff roles to determine future space needs, which are now targeted at 400 sq. ft. to 500 sq. ft. per attorney. The challenge for law firms is to decrease real estate costs to cover technology costs, Cushman notes.

    In the first quarter of 2020 none of the firms participating in the Cushman &Wakefield survey reported plans to reduce staff or downsize office space to improve profits. But at the end of second quarter, 11 percent of survey participants were already planning to do so, and even more firm implemented layoffs in the third quarter, Cushman adds.

    Firms are expected to permanently layoff 15 percent to 30 percent of their attorneys and support staffs due to COVID-19; continue to identify employees that could potentially work from home indefinitely; and estimate how many employees will need to come to the office and how often, which will drive office design and seating strategies like hoteling, Cushman notes.

    As a result, Cushman says that markets with high concentrations of law firms, including New York, Los Angeles, San Francisco and Boston, are seeing large amounts of sublet placed on the market, which is having  a devastating impact on office vacancy and rents in those areas where other industries like tech are exiting their spaces too.New lease transactions in the legal sector are now mostly on hold, and those firms completing leases are renewing for the short-term or, if doing longer-term transactions, are downsizing space by 10 percent to 40 percent, Cushman says. Firms are also beginning to renegotiate lases early to give back space, surmising that landlords in the most impacted markets will do everything in their power to retain tenants when leases come up for renewal.

    Stephen Bay, vice chairman in CBRE’s Los Angeles office and a member of its law firm practice group, says his group estimates a 15 percent to 25 percent reduction in space occupied by law firms. “Given that no one is fully back in the office yet and no one knows what kind of spacing they will need pre-vaccine, law firms haven’t really begun to sublease their space yet,” he adds. However, Bay predicts that a significant amount of law firm sublease space is coming to most U.S. markets.

    Even so, “We are seeing a distinction between what works for partners and what works for associates. Experienced partners have worked long enough to handle a high degree of remote working, but it is much harder to learn how to do your job from home,” says Timothy Bromiley, a principal at global design firm Gensler, who leads its professional services practice area.

    He notes that Gensler’s 2020 Work From Home Survey found younger people across a wide range of industries surveyed are less satisfied with the work-from-home experience than their older peers, less likely to feel a sense of accomplishment at the end of the day, and less aware of what is expected of them.

    Gensler’s Work From Home Survey also found that attorneys prefer a flexible arrangement that allows them to work from home part of the week rather than entirely. A large percentage reported that collaborating and staying informed about what others are working on is harder to do at home.“It’s that tacit understanding of what is happening in the organization outside of your team that’s harder to maintain at home, particularly in more junior roles,” says Bromiley. He notes that senior partners will need to be in the office at least part of the week to mentor younger lawyers.

    “As mobility and virtual collaboration increases, face-to-face interactions become more meaningful and the legal workplace takes on more importance as a point of personal connection rather than just a concentration on work,” Bromiley adds. “Ultimately, a law firm is about partners growing business together. The office excels at facilitating collaboration, and team connection is critical to that goal.”

    According to Bay, every one of CBRE’s Los Angeles law firm clients is currently studying a remote working policy. “While I don’t expect law firms to become entirely remote, I do think law firms are going to need to create offices that provide their attorneys with reasons to come into the office beyond just privacy,” he says.

    Cushman notes that the pandemic couldn’t have come at a worse time for law firms. In March, when the pandemic hit, law firms had low cash reserves because they had recently distributed profits among partners. With the pandemic creating economic uncertainty and declining demand for outside counsel, growth in the legal sector has slowed or paused. According to Altman Weil, a consulting firm that tracks legal mergers, 10 cross-border mergers occurred in each of the past four years, peaking in 2019 with 17 global mergers. But only two global mergers occurred in the first half of 2020.

    As a result, the majority of law firms participating in the Cushman & Wakefield survey (55 percent), are focused on maintaining their profitability through evaluation of operations and streamlining services. 

    “Law firms actively designing their spaces during the pandemic have the benefit of looking around and responding to rapidly changing work habits and are designing their next spaces in favor of a more mobile, tech-savvy workforce,” says Bromiley, adding that firms have realized they can be highly productive in smaller home offices and with a lot less paper.

    COVID-19 accelerated the inevitable for law firms, creating an opportunity to build a more flexible culture. Bromiley notes that even though law firms already have lots of private offices that provide built-in social distancing, many have made returning to work optional for the foreseeable future. As a result, there has been little demand for reconfiguration of existing spaces.

    “Law firms are analyzing their social distancing measures, but since there isn’t a perfect understanding as to what will be necessary in the post-vaccine world, few law firms have been willing to spend a lot of money on short-term fixes, nor make long-term commitments that incorporate drastic spacing allowances,” adds Bay.

    However, that some firms are starting to question the use of shared offices, even after the pandemic subsides, according to Bromiley. “Any loss in efficiency from converting double offices to single offices would potentially be offset by remote working.”

    Bay says that few, if any, of CBRE’s Los Angeles law clients have rebuilt their spaces since the pandemic hit. “There is not a blueprint as to the best way to adopt new trends, so every firm is going to have their own approach to hoteling. There is not a one-size-fits-all for this. I also believe that no matter how much thought that is put into it, no law firm will get this exactly right,” he notes. “Therefore, I think the law firms that do this successfully will incorporate a lot of flexibility into their designs.”

    Currently, the top three expenses for law firms, as a percentage of gross revenue, are salaries, real estate and technology, respectively, according to Cushman. But with firms increasingly allocating more financial resources to technology that supports remote working, technology is anticipated to move into second position in the coming years.

    Investment in IT security to support remote working increased by 38 percent in 2020 compared to 26 percent in 2019 and is expected to increase by another 10 percent over the next couple of years to support a more distributed workforce, noted the C&W survey. Similarly, the number of attorneys expected to work remotely more often over the next five years jumped from 78 percent in 2020 just prior to the onset of the pandemic to 96 percent at the end of the second quarter.

    The mountain of paper documents used in legal cases is also declining, as firms begin scanning information on paper documents rather than physically storing it. Both Cushman and Bromiley agree that with attorneys working from home, the trend to digitize legal documents has accelerated.

    Now firms are looking at eliminating storage of paper documents, which costs them millions of dollars annually, says Cushman. “Paper use was already in sharp decline, but we expect the pandemic to mark the end of paper storage as a meaningful space requirement for many firms, especially those in high cost real estate markets,” adds Bromiley.