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Legal Aid for the Office Market

Law firms in Washington D.C. and New York City are gobbling up Class-A office space at bargain basement prices, bringing some much-needed demand to a stagnant leasing market. During the first six months of this year, 11 New York City law firms signed leases that expand their total occupied space from 1.3 million sq. ft. to 1.67 million sq. ft. over the next two years, according to CoStar Group Inc. That represents an increase of 28%. CoStar also reports that 12 law firms have leases to expand their Washington D.C. offices from a total of 1.4 million sq. ft. to 2.2 million sq. ft. — a 57% jump — over the same period.

While most industries have experienced staffing cutbacks (the U.S. Bureau of Labor Statistics says 500,000 jobs have been eliminated since Jan. 1), many law firms are taking on more business and need more space for expanding staffs.

“As corporate earnings have slumped, gross revenue of the largest law firms grew between 8% and 9%,” says Steven Bralower, vice chairman and executive vice president of Carr Real Estate Services. New York and Washington law firms are benefiting from an increase in securities regulation and skyrocketing litigation from shareholders against publicly traded companies accused of defrauding investors during the 1990s boom.

While there's a risk that law firms will wind up with more space than they need, there's a great incentive to nail down long-term leases while the market is soft. Space users have the clout to demand favorable lease terms such as lower termination fees, higher construction allowances and expansion options. And, of course, there is the base rent: As of the second quarter of 2003, New York City direct space net rents were $33.99 per sq. ft., down 29.7% from a five-year peak of $48.38 in 2000. And in Washington D.C., estimated rent for direct space was $26.99, down 12.9% from a 2001 high of $30.97.

One reason Washington rents have not fallen as dramatically, say brokers, is the city's height restrictions, which place a premium on large contiguous spaces in Class-A buildings. In a move to accommodate its growth over the next 15 years, Dickstein Shapiro Morin & Oshinsky signed a lease with two five-year options for more than 400,000 sq. ft. at Carr America's International Square in Washington, D.C. for an undisclosed price.

Many of the nation's top law firms, including O'Melveny & Myers LLP in Midtown Manhattan and Dickstein Shapiro in Washington D.C., are locking up space at low rates. O'Melveny & Myers in January signed a 20-year lease for 240,000 sq. ft. at Boston Properties' new Times Square Tower, a 1.1 million sq. ft. building in Times Square. The firm purchased the equity-powerhouse practice of O'Sullivan LLP two years ago and needed to bring the two offices — which were split between a total of 180,000 sq. ft. at Rockefeller Center and Citicorp Center — together. Citicorp landlord Boston Properties waived O'Melveny's lease termination fees in order to keep the big tenant's income.

“If I wait two years, I could be in the middle of Silicon Valley or Hong Kong rent escalation, or Midtown Manhattan escalation. In the long-term, I have locked myself into a 10- to 20-year lease that protects my long-term cash flow,” says Dave Cartwright, a real estate partner with O'Melveny & Meyers, who doubles as the firm's worldwide leasing agent.

At a time when corporate job cuts continue to drain demand for Class-A office space, law firms have provided a salve for New York City and D.C. “When you look at New York and Washington, they have the highest concentrations of law firms in the country,” says Patrick Marr, an executive vice president with CB Richard Ellis and director of the brokerage's national law firm group. “Corporate America is out of the picture, and the law firms are showing up.”

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