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ANALYSIS: Will Covid Force Firms to Ditch the Fancy Offices?

Aug. 20, 2020, 7:01 PM

If you’ve ever walked into a large law firm’s urban office, you know the vibe. Vast slabs of marble or natural stone covering the floors, the walls, the enormous front desk where a security guard scans visitors’ IDs and shows people to the elevators. A modern sculpture or commissioned painting with a plaque saying something about the artist. The calming burble of a cascading water feature.

But since the World Health Organization declared Covid-19 a pandemic in March, not much legal work is being done in these gilded quarters.

What will the recovery from Covid-19 mean for law firm office space? Now that firm lawyers have proven they can work effectively from anywhere, will their clients tolerate the overhead of fancy offices? And, if they won’t, what will that mean for law firms’ business model?

What Lawyers Want: Work From Home

When the pandemic struck, a large majority of law firms shifted to working from home, and surveys show that lawyers would like remote options to continue after the risk of Covid-19 transmission subsides.

Bloomberg Law’s Legal Technology Survey (2020) found that 84% of law firm respondents said their organizations had at least three-quarters of staff work remotely after March, and nearly a third went to 100% remote work.

A large majority (86%) of law firm respondents expect that work-from-home options will continue after the pandemic ends. Even more of those at law firms (88%) want work from home to be an option post-pandemic. Even partners want their firms to allow a work from home option (87%), which suggests that a continuation of the work-from-home culture is not only desired, but is actually likely to occur.

Research from real estate brokerage Cushman & Wakefield also suggests that law firm attorneys and staff may get their wish.

Cushman & Wakefield surveyed respondents at a range of law firms, from small local firms to large global ones.

“[A]lmost all respondents (90%) believe more than 10% of attorneys will work remotely on a regular basis. The number expecting 31%+ of lawyers to consistently work remotely more than quintupled” since Q1 2020, Cushman & Wakefield found.

Bloomberg Law reported that some state bars are shifting their view of attorneys who work from home in different jurisdictions than where they are licensed, indicating that state bars may also expect remote work to remain the norm.

But Cushman & Wakefield predicts that work-from-home “will be one part of the work location equation” and that “most [lawyers] will continue to be in the office on a regular basis.”

Clients and Partners: Law Firms’ ‘Two Constituencies’

For law firms’ two most important groups, clients and partners, continued work-from-home options may highlight what the pandemic has already laid bare: that lawyers can work efficiently outside of traditional offices. This shift may challenge law firms’ existing business model.

“Both firm partners and their clients are realizing, ‘We don’t need the real estate,’” Kevin Broyles, managing partner of virtual law firm Fisher Broyles, said in an interview.

While firm partners have traditionally viewed high-end offices as a benefit that clients seek (or at least expect) when hiring outside counsel, James Fisher, also managing partner of Fisher Broyles, believes fancy offices have always made clients a bit nervous.

“The danger for traditional law firms is that clients start focusing on the real estate the same way they’ve been focusing on first- and second-years. In 2008 or 2009, clients started refusing to pay for first- and second-year time because they recognized that it added no value to them,” Broyles said.

“If clients start looking at real estate and focusing on it in the same way, these traditional firms are in big trouble. Clients can’t say, ‘Don’t bill us for your real estate,’ because it’s baked in. What they could say is, ‘Your rates are simply too high; I’m not subsidizing your real estate,’” Broyles said.

The impact could be significant. In a virtual or “distributed” model law firm, where partners work from home or other remote offices, billing rates can be as much as 50% lower, according to Fisher.

Clients don’t miss the real estate, according to Fisher.

Historically, nice, well-located office space has been a partner-pleaser and recruiting tool for law firms.

But partners may be less enticed by plum real estate post-pandemic.

Roy Strom of Bloomberg Law wrote that as an emphasis on workplace life and culture declines, partners will simply be looking for higher compensation packages. This may help explain why most partners (87%) told us in response to our Legal Tech Survey (2020) that they want work-from-home options to continue.

As law firm culture shifts, real estate may be de-emphasized even further. Cushman & Wakefield found that associates don’t think private offices are important compared to other factors. When asked to rank various factors from most to least important, associates said compensation was first and a “collegial work environment” was second. A private office was ranked last, after “potential for partnership” and “business development opportunities.”

Those Leases, Though

Law firms are often the marquee tenants in major cities’ hot new real estate areas—a trend that may be difficult to curb, even post-pandemic.

According to Cushman & Wakefield, the legal industry has been trying to shrink its real estate footprint for the past decade, with target ratios in 2019 of 600 square feet per attorney. A quick glance at recent leases indicates that this target is not being met.

In June, Washington, D.C. law firm Wiley Rein signed one of the largest leases of 2020 so far, at 2050 M Street, NW, for 166,000 square feet, or 683 per attorney.

Williams & Connolly’s 15-year lease at The Wharf, on D.C.’s redeveloped Southwest waterfront, inked before the pandemic, is for 292,000 square feet, or 872 square feet for each of its 335 DC-based attorneys.

In a deal struck before the pandemic, Debevoise & Plimpton will lease 530,000 square feet in Manhattan’s Hudson Yards, a newer development on the city’s West Side, Bloomberg Law reported. Debevoise’s 580 New York attorneys and their staff will therefore occupy a space that’s roughly three average-sized Wal-Marts or 35 Trader Joe’s stores, or just under 914 square feet per attorney.

(Wiley, Williams & Connolly, and Debevoise did not return requests for comment for this piece.)

Cushman & Wakefield predicts a “large number of lease restructures and space givebacks will occur on a widespread basis” in the legal sector in 2021 and 2022.

“This ‘right-sizing’ of the legal sector, which currently occupies two to three times more square footage per employee than other industries, is a sector correction that is long overdue,” Cushman & Wakefield wrote.

Downsizing Is Hard to Do

Data suggest that law firm professionals may not fully grasp the degree of real estate “right-sizing” that may be necessary after the pandemic.

Though many law firm personnel expect work-from-home options to continue post-pandemic, fewer are anticipating large reductions in office space or widespread hoteling—a reservation-based, unassigned seating model that reduces real estate requirements and spend.

Cushman & Wakefield found that more than one third of firm respondents to its survey (34%) expect there to be no change to their firm’s real estate footprint due to Covid-19, and another 11% expect a square footage reduction of 10% or less.

This 10% anticipated contraction is about the same as the 10.6% actual average reduction in square footage of law firms signing leases in 2019, well before the pandemic hit, according to Cushman & Wakefield’s data.

More than half of those at law firms (55%) expect the square footage reduction to be more greater than 10%.

Responses were similarly mixed on firms retaining attorneys’ private offices despite more telecommuting. Cushman & Wakefield found that 48% of law firm partners anticipate their attorneys will work remotely more often in the next five years yet still will retain their personal offices, while 49% anticipate more remote work over the next five years and, as a result, are planning to initiate hoteling.

If one half of Cushman & Wakefield’s survey respondents are correct, it paints an even less efficient picture for law firm real estate: square footage will dwindle at about the same pace as it did pre-pandemic, but more private offices will sit empty as more attorneys work from home.

If the group who believes square footage reductions will be more severe than 10% are correct, it may not be long before clients question more seriously the overhead behind their bills.

The View From Here

Inefficiencies in legal services delivery have been on the chopping block since at least the last big recession in 2008 and 2009. The work-from-home environment of Covid-19 will draw perhaps unprecedented attention towards the inefficiencies of firms’ office space.

Prior recessions and the Covid pandemic “are leading clients to go, ‘Wait a minute, whether it’s good times or bad times, we really need to think about how much we’re paying for any kind of service, including legal services,’” Fisher said. “I think real estate has to come into that. Especially with this latest recession, where everyone is working from home, it’s like a billboard right in their face that real estate isn’t important.”

Even where attorneys may still prefer trophy space, firms will need to increasingly balance those preferences against client perceptions. The days may be gone when a law firm can justify high-end finishes and a sweeping skyline view in the name of enhanced firm culture and increased collaboration.

(For more on client expectations of lawyer efficiency through tech use, see ANALYSIS: Firms Are More Prepared to Use Legal Tech in 2020.)

More law firms will likely go in the direction of Husch Blackwell, which, Bloomberg Law reported, in July launched a nearly 40-lawyer virtual office called “The Link.” The remote lawyers volunteered to give up their office space in exchange for permanent work-from-anywhere status, with hoteling options in some firm offices. The remote lawyers will have no change in compensation, Bloomberg Law reported.

Going hybrid—a mix of in-office and virtual lawyers—could be a good option for law firms in the nearer term. But if formalized remote work results in a significant cut to firms’ real estate overhead, it may not be long before clients and lawyers begin asking for a piece of the margin in the form of lower rates and higher salaries.

The demand for greater efficiency and legal department cost-savings has only accelerated during this recession, and the “downtown office” for law firms may be the next brick to fall. To get ahead of this curve, law firms may want to stay focused on optimizing remote collaboration and question whether that honed marble and commissioned art is really their best look.

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