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The Office Market’s Brightest Spot Going Into 2024: Law Firms

The nation’s two largest office leases last year were by law firms, and the industry drove Manhattan’s market in particular. Here’s the 'secret sauce.'

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One industry in particular is standing athwart history and doubling down on the importance of physical office space: law firms. 

Law firms in the U.S. leased some 12 million square feet of office space through the first three quarters of 2023, said David Smith, head of Americas insights for brokerage Cushman & Wakefield (CWK). Fourth quarter numbers were still being finalized by press time, but, should 2023’s pace endure, it would exceed the 14.8 million square feet the legal industry leased in 2022 — and would set a new annual record. 

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The trendlines certainly lean in favor of a record. According to a preliminary C&W analysis, legal sector leasing through the first three quarters came in just 1.6 percent lower than the same nine months in 2022, a spokesperson for the brokerage said in an email. (Fourth quarter numbers from brokerage JLL (JLL) showed 6 million square feet of Manhattan office leases, with law firm deals comprising the bulk of that.)

Another trendline: the number of major law firm leases in 2023. The nation’s single, largest office lease, in fact, was the 765,000-square-foot deal in late December by Paul Weiss Rifkind Wharton & Garrison — known widely as Paul Weiss — at Fisher Brothers’ 1345 Avenue of the Americas. The 2 million-square-foot, 50-story tower had undergone a $120 million renovation, which included touchless elevators and a tenant amenity floor that includes 5,500 square feet of meeting, networking and dining space.

The deal edged out a 710,000-square-foot renewal and expansion announced in August by Davis Polk & Wardwell at RXR’s 450 Lexington Avenue (that was for 25 years). Overall, four of the top 10 office leasing deals in 2023 in New York City — the legal industry’s geographic hub — were by law firms.

“We are seeing strong demand from the legal sector and from law firms,” Smith said. “Law firms traditionally want to be in really high-quality space. They’re a little more office-centric than other industries.”

It’s not that law firms are immune to pressure to work outside the office, brokers say. But the legal industry may be the epitome of the kind of office-using sector that landlords say they are counting on: one that wants high-quality space, wants both work settings and amenities generally not found in a place of residence, and wants a place where corporate culture can be imparted amid easily facilitated collaboration and training. All of this, of course, too, is designed to attract and retain talent in what can be a very competitive industry. 

Law firm Quinn Emanuel Urquhart & Sullivan, for instance, signed for 132,000 square feet at 295 Fifth Avenue in November. The lease included the windowy, outdoor deck-festooned $350 million penthouse newly built atop the century-old building by its owners, a partnership that includes Tribeca Investment Group, PGIM Real Estate and Meadow Partners, the New York Post reported.           

According to data from brokerage Avison Young, law firms become more active in leasing when they perceive they have the most leverage. In 2023, through Oct. 24, law firms accounted for 14.3 percent of leasing activity in Manhattan, up from just 6.1 percent in 2022 and just slightly below the 14.4 percent recorded in 2010, when they thought they might have an advantage over financial firms following the financial crisis back then. This time around, law firms in New York are seizing on the pandemic-driven disruption that has in turn driven Manhattan office vacancy to historically high levels. 

On a national basis, 2023 through Nov. 9, law firms also accounted for 14.3 percent of all leasing, comparable to the wake of the Great Financial Crisis in 2009 (15.6 percent) and 2010 (16.2 percent).

In Washington, D.C., where law has long been a leading industry, firms dominated the leasing market in a difficult 2023. Law firms accounted for the three largest Washington office leases last year not by federal government entities. The largest 2023 lease in Miami was Greenberg Traurig’s 128,450-square-foot renewal.

In San Francisco, law firms are capitalizing on the departure of technology firms that pre-pandemic dominated the growth of that city’s office sector, according to C&W research. Law firms in Northern California’s financial capital are finding prime locations and a market that is “aggressively tenant-friendly,” with landlords willing to both pay more to improve leased space and to increase concessions, including more than a month of free rent per year of lease term. A similar thing is happening in New York and nationwide, Smith said.

None of that prevented San Francisco’s office vacancy rate from jumping to 35.9 percent, the highest ever recorded in city history, the San Francisco Chronicle reported in late December, citing preliminary data from brokerage CBRE.

According to brokers, law firms are among the likeliest professions to see value in coming to the office. In March, according to Bloomberg Law, Davis Polk, one of the nation’s largest practices, told its associates they would have to comply with a mandatory in-office policy Tuesday through Thursday if they want bonuses. And, in August, managing principal Neil Barr was quoted in American Lawyer as saying, “First and implicit in all this, is that we believe we are going to be a predominantly in-office firm. We are going to be growing and we don’t have enough space for our current team.” 

Such pronouncements are not surprising, according to longtime observers.

“Very high-scale, high-touch, highly refined best-in-class legal services are provided by New York City’s top tier firms, and their apprenticeship model, their collaborative model, is largely dependent on in-person work,” said Mark Weiss, executive vice chairman at C&W. “They’ve all come to the conclusion that it may not be five days, six days or seven days in the office, but it’s certainly no less than four days. That’s the secret sauce, if you will.” 

As for best-in-class property that these practices take, that includes recently vacated, or soon-to-be-vacated, office space that WeWork (WE) controlled, Weiss added. The coworking giant tumbled into bankruptcy toward the end of 2023.

“Law firms, I think, have concluded that office space is an important element of their ability to communicate confidence and culture, and just the ability to serve their clients well,” said Thomas Fulcher, a Savills vice chairman and lead of that brokerage’s legal tenant practice group. “(They’re) getting back to normal in terms of making space commitments. And they are also getting back to normal in terms of continuing to get more efficient.”

It might be, too, that what’s normal never really ceased for most law firms, particularly corporate ones. REIT analyst Alexander Goldfarb told CO last spring the pandemic embrace of hybrid work schedules paled in comparison to earlier changes in the typical law firm’s footprint. For instance,  the abandonment of law libraries over the past two decades — with most of the law books and histories of past cases going from hard copy to computer files that take up little to no space — was a much bigger real estate change for the industry.

“Overall leasing is down this year,” said Danny Mangru, manager of market intelligence in the tri-state region for Avison Young. “We’re going to end lower than last year, that’s for sure. But, if you look at it from a law firm perspective, it looks like law firms have become more active in the market.”

C&W’s Weiss said he sees law firms as being part of a revival of leasing interest by some of New York’s most stable and core industries, including financial services and nonprofits. They’re taking advantage of greater availability and what tenants would view as more reasonable pricing.

“When I started my career, everyone worked six days in the office,” said Weiss. “And that migrated to five days a week. Now that they’re going from five to four, very few are taking less space. There was a trend before COVID for more common space and a better environment. Everybody predicted massive compression and utilization of office space, and it just hasn’t happened.”