By Meghan Hall
In Gateway markets across the country, so much of commercial real estate news revolves around expanding tech and life sciences companies: their acquisitions, leases and developments. However, another key submarket is radically changing in ways that many experts would not have normally predicted: the legal sector. According to Cushman & Wakefield’s Legal Sector Advisory Group Executive Managing Director Sherry Cushman, law firms are, more than ever, reducing their office footprint due to a variety of factors, including technology, changes to fixed fee structures and employee expectations.
“Law firms occupy a very high percentage of Class A and trophy real estate in all of these foundation markets such as San Francisco, New York, Chicago, and the industry as a whole has gone through dramatic shifts in the last decade, far greater than we’ve seen at any time prior,” explained Cushman. “When you look at the sector as a whole, what used to take 10 years to change, now takes two to three.”
While many of those changes have been because of technology, another huge factor driving change within the legal industry are alterations to fixed fee structures and the way lawyers are paid. 20 years ago, lawyers could bill for every minute worked without question. Now, stated Cushman, clients and corporate America are looking to bid for legal services, as they do any other type of sector.
“Clients are asking, ‘Why am I carte-blanching the legal sector?’” said Cushman. “Clients want more and to pay less. Historically, firms could just raise their rates to cover increased expenses, and now they cannot at all. So, when you have escalating commercial real estate costs and escalating salaries and everything else, they have to effect change to bring costs down.”
Often, those changes have come in the form of consolidating or densifying a firm’s commercial real estate footprint. According to Cushman & Wakefield’s 2019 Bright Insights report, which analyzes the status of the legal sector, the average percentage of gross revenue spent on real estate decreased to 5.9 percent. Four years ago, the report states, that number was seven percent, indicating that firms are continuing to drive down square footage occupied on a per-attorney basis. Cushman estimates that when law firms relocate, they are reducing their office footprint by 30 percent, and that while firms used to allocate 1,000 square feet per attorney, that is now down to 600 in some cases. When firms decide to renew a lease, they, on average, reduce by 18 percent.
The Bright Insights Report also states that architects’ current target ratios to design space in the current market have also decreased. Approximately 20 percent of architects design space for under 400 square feet per attorney, another 20 percent counts for between 401 to 500 square feet for attorney, and 30 percent of architects account for between 501 to 600 and 601 to 700 square feet per attorney, respectively.
76 percent of firms also anticipate their attorneys will work more remotely in the next five years, and as a result a greater focus is placed on common areas and collaborative spaces. Other anticipated changes include increased building amenities, a greater focus on wellness, hospitality integration and smaller individual offices.
Additionally, the legal sector’s real estate decisions are more frequently impacted by employee expectations and younger partners. For the first time ever, the Bright Insights report lists employee retention as the biggest challenge that law firms face today.
“If a law firm is signing 10 to 15-year leases, are they making these decisions based on current partners? Future partners? That’s a big shift,” said Cushman. “We’re seeing a complete transformation of the workplace because firms are reacting more to issues like recruiting, retention, technology and other things the younger generations really like.”
63percent of firms ranked employee recruitment and retention as the number one challenge to their firms. While firms strive to keep employees happy, other real estate considerations that law firms reported struggling with included escalating rents, high real estate maintenance costs, high vacancy rates, poor lease terms, out-of-pocket capital costs, constant moving and struggling to break into new markets.
The purpose of the Bright Insights Report, Cushman explained, is to help law firms navigate these challenges.
“We realized it was no longer about just bricks and mortar,” said Cushman. “It is not about the hard walls or the ceilings. It is about what real estate needs to be for you. Law firms are partnerships, which means you need to get buy-in. The best way to do that with lawyers is to give them statistics and figures and facts and benchmarks to show them where they stand versus their competition.”
Still, while law firms are changing, they are doing so slowly, and will continue to do so as the market, their employees and their clients demand.
“Firms need strong leadership to effect change more quickly. Even though older partners may not like it, they have to shift,” explained Cushman. “There are four generations working under one roof right now. It’s tough because the older generation has more decision-making power. But now, at least for a lot of firms, when we work with them on the real estate side, younger associates are included in the visioning and strategy sessions.”
