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NEW YORK CITY-Tough and active. That’s how brokers and owners view their relationships with legal-firm tenants. In an industry first, both sides of the negotiating table were surveyed recently by Real Estate Media Network and ALM to measure and dissect the nature of the broker/law-client dynamic, and the results reveal an active relationship that is simultaneously challenging and mutually beneficial.

In October, two surveys were emailed to readers of Real Estate Media’s Real Estate Forum and readers of ALM’s Law Firm Inc. Participants in the ALM survey were asked to characterize the nature of their relationship with the real estate ownership/brokerage community, while the owners and brokers taking the Forum survey were asked for their thoughts on law firms as a client base. The combined results, presented yesterday at Real Estate Media’s LegalSpace 2005 conference, paint a colorful picture of this specialized industry niche.

To set the stage, the leasing market as a whole is considered very good by 54.5% of the owner/broker respondents. Some 34.1% called it fair while 11.4% think the market’s excellent. Against that optimistic backdrop, most brokers and owners (63.6%) characterized law-firm activity as very good. In fact, as one respondent observed: “Law firms exhibit more growth and stability than any other industry group.”

“It doesn’t surprise me,” comments Robert Bach, director of market analysis for Northbrook, IL-based Grubb & Ellis. “About a year ago our Chicago office noticed the large number of legal tenants changing buildings. One law firm upgrades space or goes to a new building, and everyone thinks they have to do the same thing.”

Trevor Delaney, editor in chief of LawFirm Inc. and Small Firm Business, adds that ideally, law firms want space that grants them the option to expand internally. “The ability and flexibility to grow within space is the most important factor in choosing space for offices of 50 or more lawyers.”

Of course, not all owners and brokers are getting a lot of activity from their legal tenants, and 29.5% of participants rate law-firm activity as only fair. Going to the extremes, some 4.5% of respondents rated law-firm activity as excellent, while a bit more than half of that (2.3%) termed it poor. Law firms represented up to 25% of all leasing activity for 61.4% of respondents and up to 50% of volume for 29.5%. Some 4.5% say that law firms represent up to 75% of their business, and an equal percentage claim they speak for 100% of their volume.

But while law firms represent half (or less) of the business for the majority of owners and brokers, they also tend to be the highest-maintenance clients. Nearly two-thirds of polltakers (59.1%) report that law firms are the most demanding customers. By contrast, 38.6% say law firms are no more or less demanding than any other client and 2.3% think the sector carries fewer demands into a lease.

“I chuckled when I saw that,” says Bach. “It’s their job coming through.” Yet, as one participant believes, though lawyers might be tough, they are not always the most informed clients. “The biggest mistake that I see law firms make is to represent themselves as their own legal counsel,” the respondent relates. “Small firms too frequently use non-real estate attorneys who miss the important real estate issues while focusing on the legal issues that rarely occur.”

But even the larger, more polished firms can blunder in the negotiation process. “Large firms err even though they use their own real estate specialists,” the polltaker continues. “While these specialists are able to examine the real estate issues, there’s less risk to the firm’s relationship with their landlord if the attorney negotiating the legal terms is from outside the firm.”

Turning to those real estate issues, specifically concessions, 40.9% of owner/broker respondents say that in the past six months, there’s been no change in the number of concessions awarded to law-firm tenants. Of those who differed, the majority (36.4%) reported fewer concessions. Only 22.7% of owner/brokers say law firms are landing more breaks on lease deals.When they do win those breaks, the top concession is in rent escalations, according to 56.8% of the audience. Sublets came in second at 52.3% and electricity riders/take-backs and special agreements tied for third at 36.4%. All other categories, including damage and destruction clauses, defaults and insurance, all logged under 25%.

In an attempt to peg the market geographically, the survey asked owners and brokers where their clients were renting space, and of course, given the nature of the work, the major national markets rose to the top, with New York City coming in first with 77.3% of the vote. Washington, DC followed at 68.2%. In descending order from there were: Los Angeles (36.4%); Chicago (29.5%); Boston (18.2%); and San Francisco (15.9%). Revealing specific data on three of the survey’s top markets, Michael Desiato, group managing director of Real Estate Media, says that through the third quarter this year, legal firms in Washington, DC have taken nearly 3.8 million sf of space, just over 2.3 million sf in Manhattan and about 476,000 sf in Chicago, per Cushman & Wakefield figures. Significantly, Desiato added, Manhattan could be on pace to reach or top last year’s record number of legal space leases—4.2 million sf, according to CBRE. “It’s getting close now to where legal tenants could be overtaking the financial services industry,” he said. “In fact, 2003 was one year during which legal tenants rated higher in terms of space versus financial service firms. The gap is closing, so we’ll see what happens.”

While law firms are more demanding than run of the mill clients for most brokers and owners, their management style was pretty run-of-the-mill, and most law firms seem to have adopted a hybrid of centralized and decentralized management. In fact, 47.7% of respondents report that leasing decisions are being made most often by combined headquarters and local-office decision-makers. Local offices acting independently call the shots for 43.2% of polltakers, while 9.1% get their marching orders from the client’s HQ.

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