U.S. law firms are just not following the recovery trend experienced by the rest of the professional services industry, and are giving up occupancy in many major markets.
A new report by real estate services firm Savills Studley points out that while the employment rate for the professional and business services sector is now 7.5 percent above its prior peak at the end of 2007, the number of law office employees has remained unchanged since 2009. As a result, law firms are either giving up excess square footage, sub-letting their offices, or moving into smaller spaces, according to the firm’s report.
Heidi Learner, chief economist with Savills Studley, says the reasons for the lackluster performance in the law services sector are threefold: A massive amount of mergers and acquisitions this year, international growth instead of domestic growth and revenue slowdown due to alternative pay methods.
“Law firms are one of the only sectors that has yet to come back from the recession,” Learner says. “Thus, appetite for legal space isn’t necessarily what it used to be.”
Merger activity is extremely high this year, with 50 acquisitions in the first five months of 2014. More mergers are expected, including between Boston-based Bingham McCutchen LLP and Philadelphia-based Morgan and the pending Locke Lord and Edwards Wildman Palmer discussions.
International growth has also sent more than 25,278 attorneys overseas in 2014, more than 5,000 more than in 2013, according to the report. U.S. firms are expanding into Canada, Australia, United Kingdom and China.
Total revenues for law firms fell by 0.8 percent in 2013, after a 5.1 increase in 2012. Learner says the reasons for the lagging profits include clients’ unwillingness to pay hefty fees and preference for alternative fee arrangements, such as contingency or fixed fees. Some corporate clients are also using in-house legal departments.
“The trend is toward more strict or project-orientated legal arrangements,” she says. “Plus, you have the successive drop in bankruptcies each year since the recession. They haven’t even really been benefiting from continued regulatory work.”
Example abound this year of law firms opting for space reductions. In New York, Weil, Gotshal & Manges renewed its headquarters lease, but opted for 30 percent less space. Kaye Scholer moved from an existing 330,000-sq.-ft. office to 250,000 sq. ft at 250 W. 55th St., and Paul Hastings is leaving 240,000 sq. ft. at 75 E. 55th St. to 180,000 sq. ft. at 200 Park Ave. In Washington, D.C., Arnold & Porter has reduced its space in the past three years from 485,000 sq. ft. to 375,000 sq. ft., and Nixon Peabody is reducing its space by 30 percent. In Chicago, Seyfarth Shaw has eliminated one-third of its space, Latham & Watkins downsized to 136,000 sq. ft. in its move to the AMA Tower and both McDermott Will & Emery and DLA Piper plan to pare down their offices once they move into the new River Point building.
Learner says she expects that reduced space allocations are likely permanent, and that law firms will continue to keep headcounts down.
“It’s going to depend a lot on the lease timing,” she says. “If it can make sense to take 85 percent less space…by going into a new building with concessions, the new move-in costs are covered.”