Law Firms Are Shrinking in Size; Coronavirus Only Accelerated It
In 2017, brokerage Cushman & Wakefield (CWK) asked 500 law firms a question: Do you anticipate your attorneys will work more remotely in the next five years? Of the respondents, 62 percent said yes. The brokerage asked the same question in January 2020. This time, the figure jumped, with 78 percent responding yes.
And that was before a pandemic.
When the brokerage asked the question amid the coronavirus outbreak this spring, some 120 firms, large to small, responded—and 96 percent said yes, they anticipated their attorneys will work more remotely in the next five years.
The survey results highlighted real estate changes already under way in the legal field that the pandemic has only accelerated, according to brokers and other analysts. Law firms nationwide were densifying their offices as they re-evaluated how much space they really needed.
One of the byproducts of this re-evaluation was having more employees work remotely, at least part time. The pandemic has kept these same employees away from the office full time for months now—and they might not all be coming back.
“Each week that passes the comfort level increases,” said Sherry Cushman, an executive managing director at Cushman & Wakefield and head of its legal sector advisory group. “We anticipate that we’re going to see quite a bit of lease restructures and givebacks of space.”
It’s also the economy. The pandemic-spurred recession has led to tens of thousands of layoffs and counting in the legal sector: as many as 64,000 from mid-March to mid-April, up from 1,700 during the same period in 2019, according to federal statistics. And the tumult has firms realizing they might not need so much space after all.
While early data suggest that the impact could be big—certainly bigger than any fallout from the Great Recession, it might be at least a couple of years before the commercial real estate market feels the full effects of the pandemic on the legal sector.
The one clear thing is that leasing by major law firms has so far tanked. The number of leases nationwide for at least 30,000 square feet—including renewals—dropped 70 percent during the first five months of 2020 compared with the same period in 2019, according to Nancy Muscatello, a managing consultant at CoStar (CSGP) Group.
There was also a pronounced drop in law firm leasing in the New York area, the country’s legal-eagle capital. There were seven leases or renewals of at least 30,000 square feet inked in the region during the first five months of 2019, and three during the same period in 2020.
“I would add that given the lag in lease-deal reporting, some leases signed in May 2020 may not have yet been reported,” Muscatello said over email, “but certainly, activity is down significantly from its pace in 2019, and in previous years.”
Law firms are a big enough presence in major markets such as New York and Los Angeles that landlords and brokers are feeling these declines. In the New York area, law firms occupied 41.8 million square feet of space by May—or 4.8 percent of the market—according to Costar. The sector also occupies between 4 percent and 5 percent of the office space in the L.A., Chicago, Washington and San Francisco metros.
The question, though, is what these footprints will look like post-pandemic and what that will mean for the commercial real estate business, never mind the legal industry itself. Right now, the focus is on the drop in leasing activity. Up next could be a further major reimagining of the modern law office.
“It’s certainly no surprise that we’ve seen activity slow to a crawl in that major capital decisions are being put off by most firms,” said David Goldstein, a vice chairman and a director at Savills. “We’re all going to be unpacking the results of the work-from-home experiment, which I think has accelerated everyone’s thought process and mindset around the shaping of the workplace going forward.”
Doing due diligence
The legal industry has for years now explored ways to reduce its overall office footprint. Firms have also looked at how to reconfigure spaces to better attract and service millennials, the first cohorts from which joined the field in the mid-2000s.
Right now, the legal sector occupies two to three times what any other business sector occupies on a per-employee basis—300 to 400 square feet per employee—according to Sherry Cushman. Insurance firms and banks work with 150 to 200 square feet per employee, and tech firms can give or take 100 feet per worker, she said. That’s employees overall, too—attorneys by themselves usually each occupy much more space and partners even more.
But the industry has been moving away from that. The trend has been particularly noticeable in the past few years, brokers say. Space allocated to attorneys in 19 North American markets fell 5.9 percent, to 836 square feet on average, from 2017 to 2019, according to a Colliers International survey. The average amount of space for partners dropped 6.3 percent, to 1,825 feet.
At the same time, more law firms are reconfiguring their space. They’re opting for smaller, single-size attorney offices as well as more collaborative spaces, according to a Cushman & Wakefield-organized survey released in June 2019. More law firms are using hoteling, too, where reservations replace assigned seating.
It’s all part of an effort to densify the law office to accommodate changes in the industry. The two biggest changes surround hiring and technology.
That same June survey by Cushman & Wakefield found that recruitment and retention was the top issue for law firms in terms of competition for business—the first time the issue had topped the six-year-old survey. It also noted that much of the issue revolved around attracting and keeping millennials.
The field is full of them. American Lawyer Media estimates there are 63,000 attorneys at the nation’s top 500 law firms who were born between 1981 and 1996, most based in the U.S. Compare that with 20,100 Baby Boomers and 35,200 Generation X attorneys.
These millennial hires have driven the space reductions and reconfigurations. The younger attorneys are looking for more dedicated collaborative space and fewer corner offices, analysts say. Lucky for law firms, they’ve got space to play with due to technology.
A Colliers International analysis from 2019 contrasted today’s law offices with those in the early 2000s. The emphasis then was on large floor-plates that included not only private offices but a large library for record-keeping and research, and room for support staff. Digitization has ended the need for that library and for a lot of that support staff (at least on-site).
In fact, law firms are projecting that their technology expense could go up anywhere from 5 percent to more than 25 percent, according to Sherry Cushman. Such increases are driving decisions about space needs. Brick-and-mortar costs are on the table at more firms in terms of potential savings, especially now that the pandemic has driven more lawyers and staff to work remotely.
“We’ve been predicting for the past five years that technology will probably flip-flop with real estate in terms of cost,” Cushman said.
Case by case
In July 2014, the journal of the American Bar Association, as good a barometer about industry groupthink as any, ran an article about firms’ efforts “to reduce expensive square footage” and make other changes “for success in an age where lawyers don’t need to be in the building—and some don’t even want to be.”
Due to this yearslong densification trend and the ongoing shift to remote working, the legal sector might now be in a particularly good spot to weather the pandemic in the short term.
Even its traditional reliance on separate offices will help. As Savills’ Goldstein notes, such a setup dovetails nicely with the need for social distancing. He contrasted this setup with the traditional way in which technology companies have arranged their office space: in veritable acres of open desks or short-walled, side-by-side cubicles.
As far as long term, changes will vary firm-to-firm, depending on workload and other servicing needs. Firms specializing in M&A activity, which has plunged globally, might need less space than those specializing in bankruptcies, which are expected to surge, for instance.
But the industry’s overall commercial real estate trends are likely to continue out of the pandemic—just as they preceded it. That means leaner law offices pivoting more on technology and with fewer, or at least smaller, private spaces.
“The days of coming in five days a week, 10 to 12 hours a day, while there might be a small percentage that does that,” Cushman said of attorneys, “we are not anticipating that at all.”