Law Firms Come to Terms with Shifting Space Needs

NEW YORK CITY—The legal profession may have been slower to adopt current workspace trends than other occupiers, but a new report from Savills Studley makes it clear that change is coming. “In a sector where individual offices are still the rule rather than the exception, we expect that law firms will occupy increasingly less space in the years ahead and look to extract many of the space efficiencies that other service sector firms have already embraced,” according to the report.

As the report's subtitle—“How the Legal Industry Landscape is Shaping Occupancy Trends”—makes clear, secular changes are behind the downsizing and redistribution of office space. “As pressure on fee arrangements and continued M&A activity among firms weigh on headcount, many law firms are finding themselves with more office space than may be necessary,” the report states. “At the same time, firms are grappling with the best ways to use their real estate as a tool for retaining employees and maximizing their effectiveness.”

The report notes that the current year may well surpass 2015 for mergers and acquisitions “as firms look to strengthen their ability to serve their clients by adding new practice areas and growing existing ones, all while reducing duplicative expenses.” In addition, law firms' research budgets are down generally, and an increasing number of large and small firms are pursuing alternative staffing strategies.

Looking at the Am Law 200, produced annually by GlobeSt.com's sister organization, The American Lawyer, Savills Studley sees greater performance among the top 100 firms in terms of cumulative revenue growth per attorney. Accordingly, the report notes, the smaller firms have faced the most pressure on fees; “it is also possible that headcount at smaller firms is still elevated relative to their larger brethren.” Savills Studley notes in its report that it has completed transactions for 76 of the Am Law 100.

Although the report notes “no shortage of concerns over the future of the operating environment for law firms,” it says that one of the most persistent and cost effective trends has been the downsizing of space to reduce real estate costs.

In larger metro areas, rental expense averaged 8.1% of law firms' gross receipts per equity partner—a nontrivial amount that provides an opportunity to realize cost savings through more effective utilization of space,” the report states. In line with this goal, many firms have begun looking for subtenants; still others have already sublet space or have downsized as leases expire.

However, reductions in space aren't the only measures that law firms are undertaking to boost profitability. They've been reining in support staff and the number of paralegals they employ. On the revenue side, “firms have continued to face pressure to move toward alternative fee arrangements,” the report states.

To further reduce expenses, many law firms are considering the use of universal or standard-size offices, thereby “paring back the perk of the super-sized corner office” in favor of 150 to 165 square feet per associate and partner alike. Along with reducing upfront costs by allocating fewer square feet to each attorney, universal offices offer the benefit of lower transition costs and less disruption to the work environment. “Offices no longer need to be physically reconfigured to make room for a newly promoted partner, for example,” according to the Savills Studley report.

Law firms have also begun shifting operations such as accounting and information technology to lower-cost locales. Following a search for a place to locate its second global business services center, Washington, DC-based Hogan Lovells recently selected Louisville, KY for its 31,000-square-foot operations center, “promising to hire 100 people in the Louisville office within the first year at an average of $65,000 (and gradually building a 250-person workforce by year eight) in exchange for an incentive package worth up to $4 million,” the report states. It cites an added benefit of shifting operations to a “neutral” city: “the perception that all offices have access to a firm's operations staff.”

NEW YORK CITY—The legal profession may have been slower to adopt current workspace trends than other occupiers, but a new report from Savills Studley makes it clear that change is coming. “In a sector where individual offices are still the rule rather than the exception, we expect that law firms will occupy increasingly less space in the years ahead and look to extract many of the space efficiencies that other service sector firms have already embraced,” according to the report.

As the report's subtitle—“How the Legal Industry Landscape is Shaping Occupancy Trends”—makes clear, secular changes are behind the downsizing and redistribution of office space. “As pressure on fee arrangements and continued M&A activity among firms weigh on headcount, many law firms are finding themselves with more office space than may be necessary,” the report states. “At the same time, firms are grappling with the best ways to use their real estate as a tool for retaining employees and maximizing their effectiveness.”

The report notes that the current year may well surpass 2015 for mergers and acquisitions “as firms look to strengthen their ability to serve their clients by adding new practice areas and growing existing ones, all while reducing duplicative expenses.” In addition, law firms' research budgets are down generally, and an increasing number of large and small firms are pursuing alternative staffing strategies.

Looking at the Am Law 200, produced annually by GlobeSt.com's sister organization, The American Lawyer, Savills Studley sees greater performance among the top 100 firms in terms of cumulative revenue growth per attorney. Accordingly, the report notes, the smaller firms have faced the most pressure on fees; “it is also possible that headcount at smaller firms is still elevated relative to their larger brethren.” Savills Studley notes in its report that it has completed transactions for 76 of the Am Law 100.

Although the report notes “no shortage of concerns over the future of the operating environment for law firms,” it says that one of the most persistent and cost effective trends has been the downsizing of space to reduce real estate costs.

In larger metro areas, rental expense averaged 8.1% of law firms' gross receipts per equity partner—a nontrivial amount that provides an opportunity to realize cost savings through more effective utilization of space,” the report states. In line with this goal, many firms have begun looking for subtenants; still others have already sublet space or have downsized as leases expire.

However, reductions in space aren't the only measures that law firms are undertaking to boost profitability. They've been reining in support staff and the number of paralegals they employ. On the revenue side, “firms have continued to face pressure to move toward alternative fee arrangements,” the report states.

To further reduce expenses, many law firms are considering the use of universal or standard-size offices, thereby “paring back the perk of the super-sized corner office” in favor of 150 to 165 square feet per associate and partner alike. Along with reducing upfront costs by allocating fewer square feet to each attorney, universal offices offer the benefit of lower transition costs and less disruption to the work environment. “Offices no longer need to be physically reconfigured to make room for a newly promoted partner, for example,” according to the Savills Studley report.

Law firms have also begun shifting operations such as accounting and information technology to lower-cost locales. Following a search for a place to locate its second global business services center, Washington, DC-based Hogan Lovells recently selected Louisville, KY for its 31,000-square-foot operations center, “promising to hire 100 people in the Louisville office within the first year at an average of $65,000 (and gradually building a 250-person workforce by year eight) in exchange for an incentive package worth up to $4 million,” the report states. It cites an added benefit of shifting operations to a “neutral” city: “the perception that all offices have access to a firm's operations staff.”