Universally, everyone is hearing that firms plan to make significant cuts in real estate spend starting, well, starting as soon as the next office lease comes up for renewal.
How “substantial” might those cuts be?
You would think a massive and sophisticated industry like BigLaw would have copious data breaking down overhead expenses, but if you thought that you would be a tyro in our world. Of course there’s no centralized or even consistent data source! The best one can do is restate the conventional wisdom to the effect that “occupancy” costs (office rent/leases, maintenance, security, furnishings and fixtures, utilities, etc.) is the second largest single category of spending for law firms, after salaries and benefits for lawyers and staff.
On the other hand, some suggestive data and some relatively hard figures are available from, where else, sources outside Law Land. According to Law Firms are Dumping a Significant Amount of Office Space (published in October 2020), in 2019—need I remind anyone, the last full year before the pandemic—law firms accounted for 5.9% of all office leases signed in the US.
Judging by the context, presumably the unit of measure for that 5.9% figure is square feet, but it could be lease value by $$, and unfortunately the authors don’t exactly make it clear for us which it is. I offer this distinction because unlike some distinctions it is one with a difference; one can venture with a high degree of confidence that some industries’ share of square footage exceeds their share of lease expense (warehouses, anyone?) and for other industries the reverse holds (and yes I’m guessing law firms are in Column 2).
In markets like Adam Smith, Esq.’s home (Manhattan), CBRE ranks law firms the fifth largest industry in terms of signing up for space, at 819,735 sq. ft. during 2019.
But there’s more.
A relative treasure trove of data and perspective comes from an annual “Legal Sector Benchmark Survey,” (new to me but now in its seventh year), compiled by the real estate services firm Cushman & Wakefield under the direction of Sherry Cushman, Executive Managing Director of the firm and vice chair of the legal sector advisory group.
Better yet, we have some historic data: Around the time of the GFC (say, a decade+ ago), firms allocated 1,200—1,400 square feet per attorney. As of 2019, new law firm leases were coming in at a little over half that, closer to 700 square feet per attorney. The guesstimate offered in the article for the post-Covid-10 “target ratio” is said to be more like 400 sq. ft. per attorney—or even less.
If you take these figures at face value, we’ve cut our per-lawyer space by 50% over the past 10-12 years and we’re about to cut it by another 40% or more. According to Ms. Cushman, new law firm leases signed in 2018 and 2019 (moves to entirely new space, that is) averaged 29% smaller than the old space, and even renewals (in the same space) took a typical haircut of 19% of the original space.
It’s reasonable to imagine that as the world begins to emerge into the sunny Alpine meadows of the post-Covid world (admit it—Covid fatigue is a real thing), firms will feel more confident about re-evaluating their long-term space needs. We’ll have a grip on who and how much “WFH” there will be, and since office leases are among the longest time horizon financial decisions that law firms regularly make, careful analysis will, we can only hope, be brought to bear.
To that point, Cushman & Wakefield makes a strong and critical point: They forecast that 2021 and 2022 will see “a large number of early lease restructures and space givebacks on a widespread basis [across] the U.S.” And get this (emphasis supplied):
This “right sizing” of the legal sector, that currently occupies two to three times the square footage per employee than other industries, is a sector correction that is long overdue. Our surveys have consistently shown that firms have begun to downsize and be more efficient in their use of space, but entrenched practices allowed firms to be complacent and resistant to this change. Technology advancement, a shift to the younger generations gaining prominence in the workforce, and COVID-19 changed those attitudes. In 2025, it is anticipated that 56% of the U.S. prime working aged employees will be millennials. This statistic has and will continue to have significant impact on the legal sector and its real estate decision-making for the future.
We’re not done.