CBRE RESEARCH
21
st
CENTURY
LAW FIRM
THE
WA S H INGTON, D. C . L AW F I R M R EA L ES TAT E S ER I ES
Fal l / Wi n te r 2015
PART TWO:
THE MORE EFFICIENT LAW FIRM
INTRODUCTION
This report is the second of the two-part series from CBRE Research examining how law firms in Washington, D.C. have responded
to the changing law firm environment by reshaping their real estate decisions.
PART I – The More Competitive Law Firm
PART II – The More Efficient Law Firm “The More Competitive Law Firm” report, published by CBRE
Research, discussed the implications of wider market factors
in the legal industry, such as the surprisingly large number of
firms that have established a D.C. presence for the first time,
the local impact of industry mergers and acquisitions and
large dissolutions.
“The More Efficient Law Firm” (covered in this report),
examines internal drivers and trends which have led to
leaner, more flexible and efficient operational structures.
This study discusses the steps law firms have undertaken
to manage their varying real estate demands and how the
implementation of those strategies – relocating, renewing
and restructuring leases and workplace reorganization – has
and continues to play out in Washington, D.C.
2 | CBRE RESEARCH
EXECUTIVE SUMMARY: THE MORE EFFICIENT LAW FIRM
EFFICIENCY REIGNS One way that law firms in Washington, D.C. have responded to competitive pressures is by increasing their
real estate efficiency. Internal drivers alone (fewer employees, less space per employee) have led Am Law 100 firms to collectively
shed more than a quarter of a million sq. ft. since 2010.
TRIGGERS PROMPT ACTION Firms tend to restructure their real estate around a lease-trigger event, such as lease expiration,
contraction or termination options or external drivers such as M&A activity. As part of this process, firms either seek to relocate to
new, more efficient premises (44% since 2010) or stay in place and restructure their existing leases (56%).
SIZE MATTERS The size of a firm’s total footprint is a factor in the relocate vs. renew decision, reflecting in part the complexity and
capital cost associated with build-outs. Since 2010, only 29% of all law firms possessing total footprints in excess of 100,000 sq.
ft. relocated, while 51% of firms with a smaller footprint opted to move.
MOVING ON UP Those law firms that moved have seized the opportunity afforded by relocation to upgrade to better quality
buildings and gain space efficiency. In the past five years, 80% of all relocations by the Am Law 100 (on a square footage basis)
opted for first generation space.
BUT PAYING LESS The combination of decreasing held shadow vacancy, adopting new standards averaging 650 sq. ft. per
attorney or less, and newer, more efficient buildings has enabled some law firms to reduce overall rental costs by 15% to 30%.
PARTNERS STILL CONTRIBUTE Law firms in D.C. typically spend between $100 to $225 per sq. ft. on hard and soft costs,
depending on whether they are modifying existing premises or relocating to new space. Average tenant improvement allowances
(on a ten year term) range from $75 to $110 per sq. ft., with firms that are moving commanding higher TI’s. This translates to
an estimated partner capital outlay of between $25 and $115 per sq. ft. depending on the firm’s design standards. As a result,
unamortized costs as of the lease expiration date remain an important consideration in the decision to renew or relocate.
AM LAW 100
$25 - $115
PER SQ. FT.
NET PARTNER
CAPITAL
CONTRIBUTION FOR
FITOUT
2014 REVENUE
4.6%
EXCEEDS
RENT GROWTH OF
4%*
* Net Effective Rent annualized since 2010
3 | CBRE RESEARCH
PART TWO: THE MORE EFFICIENT LAW FIRM
SHOULD I STAY | OR SHOULD I GO?
The key decision facing law firms is how to effectively and efficiently incorporate the evolving modern workplace. The magnitude
of desired change to existing conditions, the availability of swing space and the disruption inherent with in-place construction,
heavily contribute to the “move or stay” decision.
A slight majority of law firms in Washington, D.C. (56%) have opted to renew in place with the size of the footprint being a key
differentiator. For firms that elect to relocate, moving to new, efficient buildings provides greater opportunity and motivation to
shrink their footprint. Of the 41% of Am Law 100 firms that relocated since 2010, 63% contracted (by an average of 19%). This
provides relocating law firms an opportunity to arbitrage a reduced footprint with better quality and more efficient premises. On
the other hand, only 20% of those firms that renewed in place reduced space.
Law firms have one of the highest capital investments on space build-out. Concessions are more aggressive for firms that relocate
– the key is to maximize the utilization of landlord provided allowances while minimizing the necessity to call for partner capital.
The rent premium for relocating firms reflects the fact that they tend to move into first-generation space at a higher price point.
Renewing vs. Relocating Law Firms | 2010 to 2015 TIME AND COST
MARKET ACTIVITY
RENEWING
RELOCATING
49%
SMALLER LEASES
(25,000 - 99,999 SQ. FT.)
51%
71%
LARGER LEASES
(100,000+ SQ. FT.)
29%
56%
AGGREGATE
44%
18 - 30 months
EXECUTION BEFORE
CURRENT
LEASE EXPIRATION
24 - 48 months
$100 - $110
HARD AND SOFT COST
ESTIMATES (PER SQ. FT.)
$130 - $225
AVERAGE BASE RENT AND
CONCESSIONS
TI: $99 per sq. ft.
ESTIMATED IMPACT ON
PARTNER CAPITAL
$30 - $125 per sq. ft.
Rents: $42 NNN
TI: $77 per sq. ft.
Abatement: 0.6*
$23 - $33 per sq. ft.
Rents: $50 NNN
Abatement: 0.9*
Best opportunity to revisit and renovate space
OTHER
standards
Limited scope to make dramatic changes
Must identify swing space
QUALITATIVE
CONSIDERATIONS
Establish future brand
Access to state-of-the-art buildings and technology
Time and cost overruns and associated penalties
Resistance to change from staff and clients
Moving and other costs
Steptoe & Johnson, Dickstein Shapiro, White
& Case, O’Melveny & Myers, Morgan, Lewis &
Bockius, Hogan Lovells, Latham & Watkins
RECENT
EXAMPLES
Source: CBRE Research, Q4 2015.
*Month free per year of term
4 | CBRE RESEARCH
Arnold & Porter, Venable, Kirkland & Ellis, Simpson
Thacher & Bartlett, Pillsbury Winthrop Shaw Pittman
PART TWO: THE MORE EFFICIENT LAW FIRM
AM LAW 100 FIRMS | THE EFFICIENCY DRIVE
60% of the 94 Am Law 100 firms with offices in D.C. executed their current lease after 2010. Most have used this as an
opportunity to improve space efficiency. In aggregate, these leases have shed more than a quarter of a million sq. ft. in the
process. Firms that have contracted shrank their footprint by 20% on average.
The contraction trend began in earnest in 2012 and has since gathered pace with 427,000 sq. ft. of space returned to the market
between 2012 and 2015. In 2015, more than half of leases executed involved contractions including:
•
irkland & Ellis’ 187,000 sq. ft. lease to anchor a new trophy development at 1301 Pennsylvania Avenue, NW,
K
contracting by 11% in the process.
•
Shearman & Sterling’s relocation from 801 Pennsylvania Avenue, NW to 401 9th Street, NW, downsizing by 60%.
Am Law 100 leases executed between 2010 and 2015: Washington, D.C.
NET ABSORPTION (SF)
200,000
100,0000
0
- 100,000
2010
2011
2012
2013
2014
YTD 2015
TOTAL
- 200,000
- 300,000
% OF FIRMS CONTRACTING
2010
2011
2012
2013
2014
YTD
2015
TOTAL
25%
9%
31%
36%
67%
53%
38%
Source: CBRE Research, Q4 2015.
Despite the drive to greater operational efficiency, Net Effective Rents for Am Law 100 firms on a per sq. ft. basis have increased
by 4% per annum since 2010. This is primarily reflective of a flight to quality rather than fundamental changes in supply or
demand drivers. Total gross revenue of the Am Law 100 increased by 4.6% per annum in 20141, outpacing rent growth.
Source: The American Lawyer
1
AVERAGE
ESCALATION
AVERAGE TI
AVG. BASE
RENT
$52 NNN
2.3%*
$111
PER SQ. FT.*
AVERAGE
MONTHS FREE
0.9
PER SQ. FT.*
Source: CBRE Research, Q4 2015.
PER YEAR OF
TERM*
5 | CBRE RESEARCH
*Based on analysis of Am Law 100
leases executed from 2010 - Q3 2015
PART TWO: THE MORE EFFICIENT LAW FIRM
NON AM LAW 100 | WITNESSING NET GROWTH
Rightsizing in the legal market has not been all about contractions. Some law firms, particularly those outside the Am Law 100,
have been the unexpected beneficiaries of pricing pressures in the market. As commodity legal demand activity has benefitted
small and medium sized firms, this sector of the market has capitalized on it and taken an increasing proportion of the activity
from larger firms, leading to growth and consequently real estate expansion.
An analysis of leases signed since 2010 reveals that this sector of the legal market contravened the rightsizing trend and expanded
by a net 96,000 sq. ft. Firms that grew the most were:
•
ozen O’Connor, which more than doubled in size from 25,000 sq. ft. to 63,000 sq. ft. The firm relocated to 1200 19th
C
Street, NW in 2015
•
Sterne, Kessler, Goldstein & Fox grew by 30,000 sq. ft. in 2011, renewing at 1100 New York Avenue, NW
•
Allen & Overy moved to 1101 New York Avenue NW in 2012, growing by 27,000 sq. ft.
•
Ballard Spahr and Whiteford Taylor Preston expanded by 54% and 57% respectively
One transaction, Dickstein Shapiro, shed 200,000 sq. ft. (of which 100,000 sq. ft. was subsequently re-leased by the owner).
Excluding this transaction, the aggregate growth amongst non Am Law 100 firms was nearly 200,000 sq. ft. since 2010.
The law firm market as a whole saw Net Effective Rents increase by about 3% per annum from 2010 to date, while the entire
market including non-legal firms saw Net Effective Rents rise in line with inflation at approximately 2% per annum over the same
period.
200,000
SQ. FT.*
EXPANSION
SINCE 2010
LAW FIRM
RENTS
3%
(EXCLUDING DICKSTEIN
SHAPIRO)
*
* Net Effective Rent Annualized Since 2010
*Firms presently outside the Am Law 100
6 | CBRE RESEARCH
PART TWO: THE MORE EFFICIENT LAW FIRM
WORKPLACE STRATEGIES | AN INTERNAL CATALYST FOR EFFICIENCY The trend towards contraction is driven in part by a reduction in headcount, but workplace strategies are also driving change. For
law firms, using their space more intensively (putting more people in less space) and improving the functionality of the space they
maintain are critical factors.
Average lease lengths of 14 years suggests that most law firm space was designed in a prerecession era with a typical ratio of
750 sq. ft. per attorney or greater. Many firms today are moving to a ratio of 650 sq. ft. per attorney or less. Support staff is also
decreasing with new ratios of four to eight attorneys per administrative assistant, almost double previous support ratios. This
places an added demand on creating a flexible footprint that is easily able to accommodate more attorney offices and fewer open
workstations for support personnel.
Firms are redesigning their workspaces not only to reduce overhead, but also to foster a flexible and collaborative work
environment, improve talent acquisition and enhance corporate branding.
With Millennials now the largest generation in the U.S. labor force, law firms are “future proofing” their space to ensure that it is
flexible enough to support new expectations for a more social and connected experience in the office.
Themes Driving Workplace Efficiencies
1
2
STANDARDIZATION
COLLABORATION
• One or two office sizes for partners;
universal size for associates
• F
ewer private, interior workspaces/offices
and more unassigned stations. Greater
focus on collaborative, multi-use work areas and
small meeting rooms
•
Uniform floor exteriors with common design
focused on branding
•
Fewer internal staircases or customization per
practice group/floor
DENSIFICATION
4
• Administrative assistants in clusters/pods;
paralegals in multi-use “case-rooms” or
workstations, sharing space with dwindling
paper document collection
•
Combined, single large reception/conference/
multi-function area with an increased number of
smaller work/meeting rooms
•
Libraries significantly reduced due to
digitalization - replaced with multi-use social/
workspace
•
Increased use of cloud space, shrinking server
rooms
•
“Open Door” policies and open floorplans.
Glass walls, glass or no doors to encourage
teamwork, and provide visual access while
maintaining acoustic privacy
NEARSHORING
3
• R
elocating back office/operational (e.g.
HR, accounting), even some junior legal
(e.g. document review) functions, to less
expensive, nearby locations
•
Offset by increase in key IT staff on site to
provide a higher level of service to support
virtual collaboration, digitization, and knowledge
sharing
Source: CBRE Research, Q4 2015.
7 | CBRE RESEARCH
PART TWO: THE MORE EFFICIENT LAW FIRM
Interior Space Allocation For Law Firms
New/Aspirational Model
Old Model
Previously 10% of total space
Library
Space
Personalized and custom;
very large
Partner
Offices
Varies (150+ sq. ft.); all
exterior with window
Associate
Offices
Reduction of “print” stacks by 75% or
more. Total library space reduced to
1% - 2.5% of total space
Two sizes: 150 sq. ft. (normal) / 225 sq. ft. (corner)
or
Uniform sizing - 165 sq. ft.
Smaller (120 - 150 sq. ft.); uniform;
possibly doubled, or interior
Physical Building Attributes
Old Model
35,000 - 40,000
8’4” - 8’6” clear
20’ X 20’
New/Aspirational Model
Floor Plates
(Sq. Ft.)
Ceiling
Height
Column
Spacing
Source: CBRE Research, Q4 2015.
8 | CBRE RESEARCH
15,000 - 30,000
8’10” - 9’ clear
30’ X 30’, no interior
columns along main span;
deep window to core
PART TWO: THE MORE EFFICIENT LAW FIRM
IMPLICATIONS | FOR LAW FIRMS
RIGHTSIZING TO CONTINUE Larger law firms, particularly those with total footprints in excess of 100,000 sq. ft., are likely to
continue to shed space as their leases come due. For smaller law firms in growth mode, the shedding of space by larger firms
may create select opportunities to take over high-end office space, reducing their initial capital costs. Older, commodity buildings
will become increasingly inefficient for sizeable law firms, driving them to move to newer, more efficient buildings.
BUT WITH MITIGATING FACTORS The move towards smaller, more efficient space is not inexorable, with other factors
prompting a need for more space. Law firms are likely to need more IT staff to support new applications and functionalities while
increased competition for work is likely to see the growth of internal marketing departments. However, support functions need not
be housed in prime office space and may be subject to nearshoring.
NEGOTIATING REAL ESTATE FLEXIBILITY IS CRITICAL Alternative fixed fees and increased competition from lower cost legal
service providers are pressing firms to leverage their associates in order to remain competitively priced. In order to recruit and
retain talent, firms are investing in their space, services and amenities, which makes it easier and more satisfying to spend long
hours in the office. In addition to workplace design flexibility, the ability to contractually change footprint size is also key.
TIMING IS EVERYTHING In order to maximize key elements of flexibility and landlord allowances to minimize use of partner
capital, there are benefits to commencing negotiations two to four years prior to lease expiration. This is particularly important for
firms looking to move, given the significant time and cost implications of relocations. On balance, while the legal profession is
stabilizing, the increasingly commoditized and competitive nature of the business is likely to force law firms to continue their focus
on operational efficiency and flexibility to meet both staffing and occupancy requirements.
3
MILLION
3%
OF YTD 2015
CLASS B LEASING
ACTIVITY BY LAW
FIRMS
SQ. FT.
LAW FIRM LEASES* DUE
FOR RENEWAL IN
2020 - 2021
* Leases over 50,000 sq. ft.
9 | CBRE RESEARCH
PART TWO: THE MORE EFFICIENT LAW FIRM
IN CASE YOU
MISSED IT...
BE SURE TO CHECK OUT
THE 21ST CENTURY
LAW FIRM SERIES
PART I - THE MORE
COMPETITIVE
LAW FIRM
FOR MORE INFORMATION, PLEASE CONTACT:
REVATHI GREENWOOD
Director of Research & Analysis
+1 202 585 5662
[email protected]
WEI XIE
Research Manager
+1 202 585 5642
[email protected]
NICK PHILLIPS
Research Coordinator
+1 202 585 5703
[email protected]
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