Law Firm Real Estate in the 21st Century
By Randy Lewis
Frederick Ross Company
As the second largest expense for most law firms, excluding staff expenses, real estate is a critical piece of your organization's overall financial picture. But real estate isn't just about money. Your office space has a direct impact on the way your firm does business and the message it sends about your company. So, how have the requirements for law firms changed over the past few years with regards to their real estate?
First, I'll offer a quick overview of the general real estate market, and then we'll discuss the specific trends occurring in the legal marketplace. With the vast majority of all large and mid-sized law firms based in the Downtown, or Central Business District (CBD), I'll focus on that market.
Real Estate Market Overview in Denver's CBD: 1999 to present
From the market peak in 1999, landlords have seen the occupancy levels of their buildings plummet from 95% to 82%. Over the same period, lease rates for Class A space have dropped from the high twenty dollar range to the high teens (These are "Full Service" or "Gross" rates, meaning the landlord pays for all of the building's operating expenses). In Class B buildings, the vacancy rate is currently holding at 16%, with rates about 25% less — in the $14 to $16 dollar range. The expectation is that the economy will firm up over the next 12-24 months, employers will begin to add more jobs and businesses will expand. The subsequent increase in demand for office space should cause an increase in overall rates and a reduction in landlord concessions.
With regards to the legal market specifically, I'd like to discuss the following as they relate to law firm office space: A) Staffing ratios; B) Technology and its' impact on Real Estate; C) Libraries; D) Office and conference room size and finish; and E) Location, Location, Location.
A universal trend that law firms are experiencing is the decline in the ratio of support staff to lawyers. This steady decrease in secretarial staff over the past five years has had a direct impact on both the quantity and layout of the space a firm requires. Just a few years ago, a typical law firm had somewhere around one secretary for every 1 to 1½ attorneys. Now, most firms are hovering around one secretary for every 3 attorneys. This change in the attorney-secretary ratio is also altering the proportion of "window" or executive offices to internal offices as well. This begs the question, why the change? Besides the fact that businesses in America are operating more efficiently, the biggest reason seems to be the increase use of technology.
Technology is a driving force in how firms operate today. One of the reasons firms can hire fewer support staff is that many lawyers (especially the younger set) are using technology to reduce the amount of time it takes to process a client file. Attorneys are using software to dictate directly into the computer or drafting their own documents verses having their secretary transcribe their notes or dictation. Lawyers are also using software to enter their own time into the firm's billing system. Due to the increased technological competence of attorneys, secretaries are spending more time proofing, formatting and e-filing documents, and less time creating documents from scratch. As lawyers continue to become more technology literate, we see the trend of shrinking support staff continuing.
Exceptions to Declining Staff Ratios
Information Technology (IT) and Marketing departments seem to be the exceptions in the shrinking of support staff. Most firms are increasing their annual spending on information technology, which has led to the requirement of more IT offices, computer rooms, and in some cases, imaging centers. Larger firms are looking at installing video conferencing equipment to reduce the amount of travel time to and from remote offices and client locations. Although this would seem to dictate an increase in "IT space," technology is also finding ways to reduce the need for real estate. Many firms interviewed are beginning to image their hard-copy files. This electronic filing is being done both on-site and off-site, depending upon the firm, but the results are the same — less need for filing cabinets in costly "prime location" real estate. Additionally, firms are getting smarter about where they store their paper files. Offsite storage companies (i.e. DocuVault and Iron Mountain) have been an alternative for a few years. Some firms, though, require (or desire) quicker access to their files and have negotiated deals with their landlords to utilize basement or other sub-prime real estate within their own buildings for storage. With that being said, many of the firms interviewed are still struggling with finding the most appropriate policy for document imaging and document destruction.
Hoteling as Efficient Space
A final comment on technology and its effect upon law firm space utilization. "Hoteling" has been a hot topic in the legal and accounting worlds for a few years now. Hoteling is an office setup in which mobile workers do not have permanent desks or cubicles and so must reserve a workspace when they come into the office. The concept is that a firm could have a portion of their workforce utilize technology (i.e. Internet, Extranets, Virtual Private Networks (VPNs), cellular phones) to operate out of their homes or on the road, while having a shared space in the office when required.
Many firms said that they have discussed a hoteling model, but have not implemented one. Some have tried it without success. A few are currently using hoteling for a small number of their attorneys and "Of-Counsel" partners. The issues many firms encounter, which prevents them from effectively implementing a full scale hoteling program, have nothing to do with technology. The two primary issues firms are running into are: A) Many attorneys enjoy spending time in the office and interacting with their colleagues. Although home offices sounds intriguing, many firms are finding that law is more of a collaborative "team sport" best played in the office; and B) Most attorneys do not want to share their office space with another lawyer.
The firms that use hoteling effectively (or some form thereof) are finding that with an effective IT support process in place, they can have as many as 15% of their lawyers working from their homes. Research and communication with the firm is done online. If the mobile employee does require a day at the office, they typically utilize a small conference room with a network connection and function as though they were in a standard office. Given this scenario, no additional real estate is needed as excess conference rooms function as the "hotel" suite. Many firms are looking to grow this type of employment offering as a way of attracting high quality legal professionals who require a more flexible work environment.
The Changing Footprint of the Law Library
An almost universal comment amongst the law firm leaders I interviewed was that the traditional concept of a law firm library (large areas devoted to volumes of bound collections of various legal resources) was going the way of the dinosaurs. With virtually all required legal resources being available and searchable on-line, utilizing prime office space for a traditional law library is perceived as a very ineffective use of a firm's real estate budget. Most law firms interviewed had already downsized their bound library collections or were planning on doing so during their next move or lease renewal. A few had gone so far as to remove their bound law library completely, in favor of an electronic law library. Once again, with attorneys becoming increasingly technologically competent, the trend of library's portion of overall office space shrinking should continue until they become the "8-track tapes" of real estate space. In the end, the books will simply be replaced, or assume a more ornamental purpose. However, the knowledge contained in the books will be available electronically.
Attorney Office Size
As law firms re-evaluate their real estate needs, they are also looking at the size of the attorney's offices and their conference rooms. Historically, attorneys' private offices have been richly appointed and fairly large in size when compared to a traditional office worker. The trend today is a gradual reduction in the overall space given to attorneys. With the increasing popularity of e-mail, there are fewer face-to-face meetings and more electronic conversations. Some firms are moving towards a "one size fits all" program for their partner and associates offices, in order to achieve flexibility as the partner/associate mix changes.
Conference Rooms and Common Areas
More and more firms are looking to have their attorneys meet with clients in communal conference facilities. Tenant improvement allowances are being funneled into high-end conference rooms, while attorney offices are becoming more utilitarian and receiving less of the "improvement allowance pie." This has caused a shift in the overall lay-out of law firm space. A few of the larger firms have moved all of their conference rooms to a single floor in order to take full advantage of the highest quality space in the building. The "image" space within the firm, containing the conference rooms and reception areas, might be finished out with $50-$60 per square foot tenant improvements, while the general office area is given a $25-$30 allowance.
Firms are also looking to add more "war rooms" that ever before. These are typically interior rooms with a lower quality finish which can be used by attorneys and paralegals while processing a case. War rooms are typically equipped with shelves for documentation relating to the matter, white boards, research computers and general workspace. More and more of the war rooms and conference facilities are being set up to be used as flexible space, with moveable walls and modular furniture which can be resized per the client requirement.
Location Is King
Location, Location, Location — words near and dear to any real estate professional's heart. A few years ago there was a lot of talk that with the increased deployment of technology, law firms would flee the Central Business District and relocate to the less expensive real estate of the suburbs. What we have found is that the exact opposite has happened. More and more firms are finding that it makes sense to stay put in the downtown business community. Why? Even with electronic filing, being close to the courthouse is still seen as a big advantage. Lawyers like to know that they are minutes away when an urgent brief or filing needs to be run over to the court. Secondly, with the long history of being downtown, many firms are finding no consensus amongst the partners with regards to where to relocate. With partners scattered in Evergreen, Boulder, Cherry Hills and Parker, a suitable location outside of downtown may be unobtainable. As the technology sector rebounds, we may see a few more firms opening their doors in Interlocken or the Tech Center, but it seems that for the time being, downtown is where it's at.
Although it appears that there are no major shifts in how law firms are doing business today, in reality, there are many small, but strategically important, changes which are affecting real estate requirements. Overall, there has been a moderate reduction in the square footage per attorney and a slight reduction in the overall square footage required by most firms. This can be primarily attributed to the reduced need for support staff, shrinking library space and elimination of filing cabinets, all byproducts of technological improvements. Increases in real estate square footage can be seen in war rooms, conference facilities, and IT departments. Firms are also shifting their tenant improvement allowances from general workspace to "public" space (i.e., conference rooms and reception areas). Many firms are also taking advantage of the depressed lease rates by renegotiating their leases with their current landlords or exploring other opportunities within the market. Firms relocating in the past few years have found that they can usually improve their office space without increasing their lease rate (i.e., upgrade from a Class B to a Class A building).
The good news is that all of this change means opportunity. With all indicators pointing to an increase in rates over the next few years, now seems like the right time to explore all of the ways that real estate can improve the strategic, operational and financial goals of today's modern law firms.
Special thanks to those who helped with researching this article:
- Howard Jenkins - Wheeler, Trigg & Kennedy LLP:
Howard Jenkins has worked in the legal administration profession for the past 20 years as a Controller and as the Director of Administration. He holds a BS degree in accounting and a MBA from the University of Colorado. Howard is a past president of the Mile Chapter of ALA.
- Bob Bach — Holme Roberts & Owen LLP:
Robert H. Bach is a partner located in the Denver office and the Chair of the Firm's Executive Committee. As the Chair of the Executive Committee, he is the Firm's Chief Executive Officer responsible for its offices in Denver; Boulder; Colorado Springs; Salt Lake City, Utah; San Francisco, California; London and Munich.
- Jack Hanley - Hoffman Reilly Pozner & Williamson
John C. "Jack" Hanley is the Executive Director of Hoffman Reilly Pozner & Williamson, LLP. Jack is a past president of the Mile High Chapter of ALA, and an Associate Professor at University of Denver's Sturm Law School's Master of Science in Legal Administration Graduate Program.
- Charlie Leder - Berenbaum, Weinshienk & Eason
Charlie Leder has been with the Firm since graduating from the University of Denver College of Law where he was Editor-in-chief of the Denver Law Journal and a member of the Order of St. Ives. During that time, his practice has included all facets of real estate law, including the representation of borrowers and lenders, landlords and tenants, and purchasers and sellers of real estate.
- Dean Nakayama - Brownstein, Hyatt & Farber, P.C.
Mr. Nakayama, Chief Operating Officer, is responsible for ensuring that the firm's administrative functions support efficient delivery of services to the firm's clients. His management responsibilities include Information Systems and Technology, Financial, Records, Facilities, Library Management, Marketing and Community Involvement, Recruiting and Human Resources.
- Owen Leslie — Acquilano Leslie, Inc.
Owen Leslie is the Managing Principal of Acquilano Leslie Incorporated. He is an AIA member and NCARB certified architect licensed in fourteen states. He has 21 years of experience in a variety of project types including new development, property acquisitions, building renovations, architecture and commercial interior design, and general contracting. Owen has acted as owner's representative for over 4 million square feet of proposed new development, and has been responsible for the architectural design and construction of millions of square feet totaling in excess of $400 million.
- Martin Edwards — Townsend Townsend and Crew, LLP
Martin Edwards is the Legal Administrator of Townsend Townsend and Crew in Denver.
- Linda Nelson — Gensler
Linda W. Nelson is a Principal at Gensler, an international architectural and interior design firm. She has been with Gensler's Denver office since 1977, providing interior design and strategic planning services to a variety of clients, with a targeted focus on law firm planning and design.