Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
The pandemic initiated a long-overdue correction to law firm operations, forcing a focus on efficiencies and the ongoing success of the firms. That might spell trouble for office landlords.
Downsizing
In the midst of the pandemic, the most notable operational change for law firms has been a reduction in office space in anticipation of attorneys continuing to work from home offices even after COVID-19 stops being a primary consideration.
Law firms began downsizing their office spaces over a decade ago when digital law libraries replaced physical ones and client perceptions of large, lavish offices shifted from a show of strength and success to an exorbitant cost.
The space allocated per attorney was reduced from 1,200-1,400 SF to about 700 SF with future target ratios due to COVID-19 at around 400 SF per attorney.
Part of the shift came with the entrance of the millennial generation into the workforce. The focus on technology and collaboration became priorities and law firm offices became denser as they began implementing open office configurations and strategies such as hoteling and unassigned seating.
The average space occupied by law firms that moved to new spaces in 2018 and 2019 was reduced by 29%. Those renewing leases reduced their space by 19%. That was also a period of flight to quality because firms moving to new, class-A space saved on rent by reducing the amount of space occupied per attorney to offset higher rental rates.
The Business of Law is Changing
Firms are expected to permanently layoff 15%-30% of their attorneys and support staffs due to COVID-19; continue to identify employees that could potentially work from home indefinitely; and estimate how many employees will need to come to the office and how often, which will drive office design and seating strategies like hoteling.
New lease transactions in the legal sector are now mostly on hold, and those firms completing leases are renewing for the short-term or, if doing longer-term transactions, are downsizing space by 10% – 40%.
Firms are also beginning to renegotiate leases early to give back space, surmising that landlords in the most impacted markets will do everything in their power to retain tenants when leases come up for renewal.
As a result, markets with high concentrations of law firms are seeing large amounts of sublet placed on the market, which is having a devastating impact on office vacancy and rents in those areas where other industries like tech are exiting their spaces too.
While I don’t expect law firms to become entirely remote, I do think law firms are going to need to create offices that provide their attorneys with reasons to come into the office beyond just privacy.
The pandemic couldn’t have come at a worse time for law firms. In March, when the pandemic hit, law firms had low cash reserves because they had recently distributed profits among partners. With the pandemic creating economic uncertainty and declining demand for outside counsel, growth in the legal sector has slowed or paused.
Law firms are analyzing their social distancing measures, but since there isn’t a perfect understanding as to what will be necessary in the post-vaccine world, few law firms have been willing to spend a lot of money on short-term fixes, nor make long-term commitments that incorporate drastic spacing allowances.
However, that some firms are starting to question the use of shared offices, even after the pandemic subsides. Any loss in efficiency from converting double offices to single offices would potentially be offset by remote working.
There is not a blueprint as to the best way to adopt new trends, so every firm is going to have their own approach to hoteling. There is not a one-size-fits-all for this. I also believe that no matter how much thought that is put into it, no law firm will get this exactly right. Therefore, I think the law firms that do this successfully will incorporate a lot of flexibility into their designs.
Technology Spend
Currently, the top three expenses for law firms, as a percentage of gross revenue, are salaries, real estate and technology, respectively. But with firms increasingly allocating more financial resources to technology that supports remote working, technology is anticipated to move into second position in the coming years.
Investment in IT security to support remote working increased by 38% in 2020 compared to 26% in 2019 and is expected to increase by another 10% over the next couple of years to support a more distributed workforce.
Similarly, the number of attorneys expected to work remotely more often over the next five years jumped from 78% in 2020 just prior to the onset of the pandemic to 96% at the end of the second quarter.
No more storing paper
The mountain of paper documents used in legal cases is also declining, as firms begin scanning information on paper documents rather than physically storing it. With attorneys working from home, the trend to digitize legal documents has accelerated.
Now firms are looking at eliminating storage of paper documents, which costs them millions of dollars annually. Paper use was already in sharp decline, but we expect the pandemic to mark the end of paper storage as a meaningful space requirement for many firms, especially those in high cost real estate markets.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com