Boston – Space reduction continues to guide the office strategy for the U.S. legal sector, with firms giving up an average of 17 percent of their space upon relocating in 2014. Office leasing transactions for the sector have seen a consistent trim this year as 15 of the top 17 U.S. law firm leasing transactions were rightsizing moves, according to JLL’s newly released Law Firm Perspective.
But the influence of rightsizing has started to slow, with a new challenge on the horizon – supply shortage. It’s an obstacle that may offer a great opportunity for the industry. Law firms battling supply constraints and the war for talent may finally start to mimic workplace strategies of their corporate peers.
“Lawyers have always needed their own space, and the industry, as a result, has held on to very traditional workplace needs and strategy,” said Elizabeth Cooper, co-lead of JLL’s law firm practice group. “However, you have to be creative with your office strategy when the model changes. The industry is dealing with fee compression, a rapidly changing workforce and changing work styles. The workplace has to evolve, and it is changing to meet these challenges.”
“In Boston law firms are continuing to right size facing the same forces that are driving other professional service firms to be leaner and meaner,” said New England Research Manager Lisa Strope. “As Boston area law firms are reconfiguring offices to be more in line with trends in the industries they serve, they are looking for flexible, more efficient spaces. Many are considering moves from more traditional and suburban locations.
“Across Massachusetts legal employment is still down nearly 2,600 jobs from prerecession peaks,” Lisa continued. “In Boston, we have seen a modest decline in legal employment over the past year. However, the intellectual property and corporate law sectors are growing, spurred on by the area’s rise in the high-tech and life sciences fields.”
Revenue for law firms is up by 4.4 percent, according to The American Lawyer, but that growth must now contend with rising rents. A JLL study predicts 77 percent of North American cities will see a rise in rents due to scarcity of available office product. This means law firms will no longer look solely at trophy or Class A office space in central business districts when they move or expand. Secondary locations are the next option.
According to JLL’s report, law firms are beginning to reach the limits of what efficiency can offer. A review of the top 35 U.S. law firm markets indicated that market-by-market 55 to 90 percent of law firms have already devised substantial efficiency measures in new or restructured leases. In Washington, D.C., for example, 82 percent of firms have already embraced rightsizing strategies. The stat is telling as law firms in the nation’s capital comprise the largest segment of the tenant base with 45 percent of the core Class A market.
Rightsizing will reach a plateau in the next couple of years, so the industry will be forced to try different approaches to location strategy. New neighborhoods near amenities that attract and retain younger talent and secondary-city locations providing valuable cost savings are slowly pulling U.S. law firms into uncharted territory.
On average, law firms have seen rents rise 3.3 percent year-on-year and pay an 18.1 percent premium for trophy space. In some markets such as Boston, Houston and San Francisco, rents have jumped more than twice that rate. Rentals conditions in most core markets are expected to worsen next year, without much relief until late 2015 through 2017, when new developments under construction will start to free up space.
There are unique resource models such as Fish & Richardson shifting a substantial part of its non-revenue functions to Minneapolis, Minnesota, or White & Case recently doing the same in Tampa, Florida. Innovative workplace strategy has driven examples like Foley & Lardner providing 12,000 square feet of space and pro-bono office hours for a digital co-working community in Chicago’s River West area, potentially creating new revenue for the firm.
“Growth may be back in the law firm sector, but firms are keeping productivity, efficiency and innovation front and center as they continue to re-define who they are and how they operate,” Cooper said. “Following years of retrenching, they are proceeding cautiously and strategically to become more nimble in meeting client demands.”