We all know what Morgan Stanley thinks: As reported by Bloomberg,
One of Wall Street’s top paid lawyers is telling his outside law firms to put an end to remote work and force their attorneys back to the office.
Eric Grossman, chief legal officer at Morgan Stanley, sent a memo Thursday to law firms and legal service providers encouraging them to improve client service by having lawyers and employees return to the office, according to a company official. Grossman’s memo suggested that those continuing to operate remotely risk their relationship with the financial services giant.
Grossman had potent air cover from none other than his CEO, James Gorman, who opined elsewhere that Morgan Stanley’ites “who want to make New York salaries…need to be in New York.”
In our considered opinion, how law firms staff their offices is none of their business. To float the unimaginable counterfactual, suppose one of New York’s white shoe elite issued a press release demanding that Morgan Stanley and Goldman Sachs bankers be in their midtown skyscraper five days a week if they want to keep their competitive edge and be entitled to the services of Said August Law Firm.
Or, less head-explody, suppose another high-profile GC announced that, now that we all know that hundreds of thousands of square feet of Class AAA office space is not, strictly speaking, a prerequisite to BigLaw getting its work done, their company would break off relations with any firm that didn’t cut waste by moving to a hoteling model in a Class B neighborhood.
Our first counterfactual might be hallucinatory, but the second is at least as plausible as Mr. Grossman’s imperious diktat and more economically rational. So, should clients have a say?
No.
But before leaving this beaten-to-death topic, have you noticed the same phenomenon we have? Namely, that all but one B2B industry is coming up with different approaches to the back-to-the-office drumbeat. Tech may be “liberal” in extending remote work plans, but at the same time Amazon, Facebook, and Google are committing to millions of square feet of long-term leases in New York, the creative industries are taking a, well, creative approach; and so on. No industry is speaking with one voice on what the world should be doing on this score.
Except one: Big banks and finance powerhouses. Not only are they speaking with one voice on “back in the office or else,” they are chiding the rest of the world to do the same. When you see an outlier like that, you (well, we) wonder what’s going on.
Permit me to share a hypothesis I first saw a few days ago in the newsletter of a lifelong New York commercial real estate industry insider. They began with the perfectly plain observation that:
Anyone who has seen the sparsely populated downtowns of major cities such as San Francisco, Boston, Chicago and New York knows that the commercial office property market is in jeopardy, even if apartment dwellers are coming back to enjoy the pleasures of city life.
So far so unexceptional.
But then there’s this:
Since office lease terms can be as long as 10 to 15 years, the risk to property owners is that as leases come due, tenants may be reluctant to renew them by taking the same amount of space for extended durations. …
Obviously, a significant drop in office leasing threatens the entire ecosystem: lending, securitization, equity ownership and real estate investment trusts, all of which are pillars of the real estate industry. This is a market well in excess of a trillion dollars and a backbone of our economy. Small wonder that one of the bulwarks of the system is trying to nip this budding problem in the bud, so to speak.
A major asset class for banks and large financial institutions is commercial real estate. LTV requirements (loan to value) of 75-80% are common for Class A space in major markets. And widespread reports from knowledgeable institutions have estimated the value of some major metro office buildings has taken a haircut of 20-25% or more. Do the math.
“This does not reflect the opinion of management” as they say (management actually has no opinion on this), but there you have it. My real estate friend’s thesis at least helps explain why Big Banks are an outlier all by themselves on this one.
Great, but what are we supposed to do?
I will close with a few concrete suggestions, which I hope you find constructive.
