Law firm consolidation will continue amid crisis

Law firm consolidation will continue amid crisis 30 Apr 2020

DC Metro News & Insights

As Washington, DC office tenants prepare for an eventual return to offices, they are considering strategies to work safely, ranging from greater desk spacing, to teleworking, to adopting a mix of traditional and flexible space.

In today’s note, however, we investigate law firms, the dominant private sector industry across the city, yet one that has lagged its peers in truly embracing workplace flexibility and reconfiguration, inclusive of the aforementioned items.

Law Firms Drive the DC Core

As the city where federal law is written, Washington, DC naturally has an office market driven by the legal sector. Eleven of the AmLaw 100 firms are headquartered here, and at least 92 have an office presence in the District. Within the city, the CBD and East End house 87% of the city’s law firms, which tally up to 19% of all office occupancy within these two submarkets.

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Furthermore, 75% of large firms (>50,000 sf) occupy Trophy and Class A office space. The city’s development pipeline is heavily dependent on top-down leasing from the legal sector. In fact, since 2010, 56% of the new construction and renovation deliveries in the CBD and East End had a law firm anchor those developments.

Legal Sector Employment Is on the Decline

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The number of employees in the legal sector dropped 26% following the last financial crisis, and never recovered even as the economy bounced back and surged well beyond its 2008 peak as technological advances have enabled firms to operate with fewer staff per attorney. Further, M&A has also played a role in reduced law firm employment. Since 2007, more than 1,000 US-based law firms have been involved in M&A, including 33 HQ’ed in Washington, DC, resulting in redundancy in both personnel and office space.

To date, most large law firms have avoided major layoffs in the current downturn. However, nearly all have slashed partner profit distributions and the majority have cut salaries for staff earning over a certain threshold (usually $40,000 to $70,000). The duration of the pandemic will determine how many firms are forced to take more drastic measures, and in the meantime, working in a fully remote environment may lead partners to rethink which staff positions can be optimized through automation and technology.  

Space per Attorney is Shrinking, but Is It Enough?

Although reduced law firm employment has hampered the local office market, the biggest threat to Washington, DC office occupancy has been the push among law firms to reduce their sf/attorney.  

Even when the recently concluded economic expansion was at its strongest, rightsizing efforts among law firms weighed heavily on the Washington, DC office market. The digitization of law libraries and adoption of higher attorney-to-staff ratios during the most recent cycle allowed law firms to shrink their footprints significantly, resulting in nearly 8 million sf of occupancy losses between 2005 and 2020, stabilizing city vacancy levels in the teens rather than single-digits.

These rightsizing efforts drove down the average sf/per attorney by 44%. Despite those efficiency gains, the sector’s space consolidation is not over. Law firms still lease far more space per employee than any other industry and rely heavily on private offices (and multiple-sized ones) rather than open workspaces or even single-sized offices. While most sectors will be giving serious thought to increasing the space between employees in the wake of the coronavirus crisis, law firms still have some room to further densify their offices.

Inclusive of support staff, a typical law firm office includes 450 sf per employee. For the sake of comparison, the next-most space-intensive sector of the DC office market is associations, at 350 sf. Being accustomed to changing space needs as their lobbying responsibilities fluctuate, associations are versed in the adoption of flexible space, as are most other industries. Coworking has by far the densest space utilization of any tenant type, at around 65 sf per member.

To date, flexible space and telework have not been widely adopted by large law firms. In part, this is because premium coworking as we now know it did not exist until the end of the most recent cycle and was therefore not taken into account as law firms selected new space. Mostly, however, brand and image have kept major law firms seeking Trophy office space that will attract top talent and impress clients.

The need for Trophy space is not going away anytime soon, but as economic conditions remain unsteady and firms fight for billings and revenue, it’s becoming clear that having an agile real estate footprint will be an advantage moving forward. We expect to see an adoption of coworking and telework, which could drive law firms’ sf/attorney ratios down by an additional 40%.

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