Law Firm Leasing in `24: What to Know With Cushman & Wakefield’s John McWilliams

Law firms, among the largest users of New York office space before the pandemic reordered the work lives of millions, were among the first industries to decide to either renew and expand their leases or to relocate into new, larger spaces. While many in finance, by far the city’s largest industry, talked about wanting workers to be present at their workplaces, law firms were among the first to put that philosophy into action.

Why, in the age of laptops that make every coffee or kitchen table a workspace, were law firms adamant about having their employees at their offices, and were, in fact, willing to provide even more space for them? John McWilliams is among those who have studied this phenomenon closely.

McWilliams, a Colorado-based research manager in the global think tank at real estate services firm Cushman & Wakefield (CWK) and co-author of its closely watched “Bright Insights” annual report on law firms as commercial real estate tenants, hopped on Microsoft Teams the other day to explain what has been going on. The report leans on data and information from the first half of 2024.

This interview has been edited for length and clarity. 

Commercial Observer: Tell me how you folks do what you do, how you know what you know.
John McWilliams: We work with some of the top legal sector brokers within not just the commercial real estate industry, but within our company, and we are in constant contact with them.

We have a survey that we send out each quarter to our researchers in 60 markets in the United States. And then we look at all the legal sector deals that are going on, and we pair that with the data we have on the overall office market, and reach some conclusions that way. But we also have a number of third-party data miners that we rely on for insights. We get just a wealth of information through those partnerships.

And then we also talk with brokers in our own business. So we’re not just talking to brokers on the transaction side of these deals, we’re also in contact with our total workplace team who works with the law firms designing out the space and making sure that we know all their needs.

So what is compelling the leaders of law firms to lead the way on returning to office, and not working remotely so much?

Law firms follow an apprenticeship model. So you have associates — first-, second- or third-year associates — that need to be in the office to work with more senior attorneys so that they can learn to do their jobs as effectively as they possibly can.

What you are saying is that younger members of the firm need to be in the office to learn the folkways of the firm and the folkways of the law, and it’s easier to do that — and quicker, I guess — when you are sitting right next to the person rather than trading emails or texts.

I would certainly agree with that. The ability to have those impromptu conversations with people, or just walk up to somebody’s desk and discuss a problem you may be having, is certainly much easier to do in person than it is over the phone.

But it’s not just associates and partners that benefit from everyone’s being there, it’s also partners that benefit from being with other partners. So let’s say you’re doing some work for a client, and it’s starting to go outside the scope of what you might normally cover. Being able to have conversations with other partners or attorneys that are involved in that space is certainly extremely valuable.

What reason is there to believe that these changes are permanent, or at least as permanent as anything is in commercial real estate? Are these changes that landlords can rely on, or is there something else coming down the pike?

It’s hard to say. What I will say is that the pandemic hit and everyone shifted to home. Then they started coming back. There were a number of dynamics at play there over the course of a few years, including that some firms became more inclined to have people back in the office. Some firms are more inclined to offer flexibility.

But now we’re almost five years past the start of this pandemic. So these law firms seem to have a very healthy appetite for top-tier premium space across the U.S., and a desire for their people to be back in that space. It looks like they just needed to see, like, three days in the office, two days remote; or four days in the office, one day remote; or some combination of that.

Hybrid work policies are definitely something that I think will stick around, and I don’t see them going  anywhere. It’s hard to predict the future. But if I had to give an inclination, I would suspect that these policies are here to stay.

Talk to me about artificial intelligence and what it means for law office demand going forward?

I don’t see artificial intelligence impacting law office demand positively or negatively at this time. It’s hard to look into the future, because the technology is so new and we don’t have a full understanding of what AI’s capabilities are.

At this point in time, it’s more about assistance than it is anything else, so you can use it to help you do your job, and maybe gain some efficiency along the way. But I don’t see that translating into impact and demand per legal office space.

So you don’t see it impacting demand for researchers, and the need to physically house them?

There is a relationship between artificial intelligence and back office legal functions like research. And my understanding right now is that AI is most effective when it uses what is called a human-in-the-loop model and depends on human interaction and judgment to control or change the outputs it produces. I don’t see it eliminating jobs. What I do see is it will allow people to improve how they do their jobs.

Have law firms been participants in the flight to quality, and, if so, is that going to continue?

Absolutely. They’ve almost been pioneers in the flight to quality.

Many law firms have shown a desire for that top-tier space. That space may only reflect 5 percent or 10 percent of the office market in a city, and so the availability rate within those top-tier buildings is likely to be significantly lower than in the rest of the market. So there’s a significant difference between the overall office market and the office market that law firms want to be in. I don’t see demand for those premium spaces going down. If anything, it will stay the same or increase — which is going to be inviting to their employees, right? They’re going to want that highly amenitized space with premium finishes in a premium location, and they are going to try to use that as a recruiting and retention tool, and also to get their people back to the office.

As I read through your report, I got the feeling that the desire to downsize a firm’s real estate might be just one factor among many that determine future law firm office demand. How would you say that in your own words?

Why the firm changes the size when they’re relocating within a market is super personal to that firm. There’s no painting that with a broad brush.

What I can say is that throughout 2024, so far 44 percent of firms have seen negligible change in the size of their lease, which we would define as change of less than 2 percent. Prior to the pandemic, in 2018, that represented 25 percent of the firms that transacted. And we’ve seen steady growth since then: 27 percent in 2019, 36 percent in 2022, 38 percent in 2023.

On the other side of that equation, the number of firms that have expanded amounts to 30 percent so far this year. That number has gone down slightly. It was 34 percent in both 2022 and 2023. But, while that number has gone down slightly, it’s shown a good deal of resilience. There are still a number of firms that are out there looking to expand their size, while the number of firms that are electing to downsize is showing a larger decrease. Look at 2021 — the number of firms that wanted to downsize represented 37 percent of firms that transacted. And, now, in 2024 through the half-year, that number was down to 24 percent.

The report shows that midsize firms are driving commercial real estate demand. Why is that, and for whom is that good news?

These midsize firms haven’t had a strong desire to be in these premium spaces like your AmLaw 200 firms do. These spaces are much more expensive than your average run-of-the-mill office property. So there’s a premium associated with it. And these midsize firms, they don’t have revenues like the AmLaw 200 firms and these top firms do.

To what extent has law firm growth locked back into its pre-pandemic pattern, and to what extent has it been changed forever?

Prior to the pandemic — 2017, 2018, 2019 — we saw 13 million square feet of leasing nationwide in 2017, 12.4 point million square feet of leasing activity in 2018, and then 14.2 million square feet in 2019, with 2019 being the highest year that we have in that pre-pandemic cohort. In 2020 and 2021, obviously the pandemic had a tremendous impact on the amount of leasing activity. In 2020 we had about 10.9 million square feet, and, in 2021, 11.2 million square feet.

But then we move into 2022 and 2023, when law firms started getting their people back into the office. They started going after these premium spaces too. In 2022, we saw a 32 percent increase in leasing activity over 2021. And, then we moved into 2023, when we had an exceptionally strong first quarter. The third quarter was stronger than normal as well.

They closed out that year at 16.9 million square feet of leasing by the sector. That’s the highest we have had going back to 2017. So far, through the first half of 2024, we have seen 8.7 million square feet of leasing activity, with the second quarter accounting for 5 million square feet. 

We’re looking at three incredibly strong years. We’re unsure whether this is the new normal for them, but it’s certainly at the point where it is becoming a trend.