For Law Firm Offices, Business Savvy Is The New Cool

By Craig Braham for Law 360

July 2017

The function of legal real estate has evolved over the years, following trends that began with technology companies and moved through the entire corporate sector. Where once offices needed to have libraries and conference rooms to impress clients, now managing partners want them to have in-house coffee bars and lounge spaces to encourage collaboration and collegiality among lawyers and build the firm’s culture.

Law firms have long understood their real estate as being part of their identity: having a “good” downtown address is required by the largest firms, just as having “nice, but not-too-expensive-looking” fixtures is essential for middle market players. In recent years, though, the office-as-brand has come to represent not only status, but values and identity. As firms work to recruit and retain young attorneys, they look to align themselves with priorities like diversity and sustainability and to manifest those priorities in their workspaces with “green” features and multicultural design elements.

Still, whether the style is retro mahogany or art deco cool, the substantive requirements for a law office are often the same: big conference rooms for practice group meetings and CLE sessions, lots of smaller war rooms and “huddle spaces” for client and team work, along with the technical infrastructure to support video conferences and other remote work. And, though the major trend in law firm space is that firms now require a smaller overall footprint, especially as attorneys depend less on physical documents and files, the legal industry still tends to be more space-intensive than some other verticals: attorneys at all levels of experience still expect to have their own personal offices and partners in many firms are resisting the industry trends and expect their offices to be bigger than associates’. Legal professionals at all levels want quiet space in which to do their writing-intensive work, along with common spaces where they can meet and collaborate.

In this dynamic market, where the very largest firms are expanding rapidly through acquisition, independent mid-sized firms are merging and consolidating, and specialized boutiques and innovative legal start-ups are being formed at a remarkable pace, law firms need flexibility in their physical space: not just the ability to make sure that ad hoc litigation teams have a place to have coffee together and kick around ideas, but to radically change their cost structure and footprint as circumstances dictate. Maybe they need to add another entire floor to accommodate the practice they just acquired and, yes, they’d like that floor to be contiguous with the ones they already occupy. Or perhaps they need to radically downsize the space they have in one market — like all those IP litigators no longer so concerned about being conveniently located for travel to East Texas — but double the size of the office they have in another.

Indeed, while we, as advisers and brokers, hear a lot from law leaders about how they want their offices to reflect their firms’ culture, it often takes multiple conversations, and lots of detailed questions, before they’re willing to talk about the impact that offices have on their firms’ financial performance. Once they do, though, they quickly come to understand that the most important decisions a law firm can make about its space have little to do with the space itself and everything to do with the terms on which they can lease it.

Time

Building owners and property managers seek long-term leaseholders, and, at first blush, the cost structure of a 15-year deal certainly might seem advantageous. But, if a firm is poised to change in that time, growing significantly or merging with another firm, that “discount” deal could end up being extremely costly.

If a firm is poised for growth, especially via acquisition rather than lateral hiring, its footprint is likely to change dramatically over the term of its lease; being locked in to a space that’s no longer suitable is no advantage. And, similarly, for a smaller or mid-sized firm that might be acquired, taking on a fixed overhead cost for such a long period has a significant impact on its bottom line and can be critical in the financial considerations of a merger deal, making a firm less attractive to a potential partner.

Size

Conventional wisdom in real estate has many firms taking on space that they can “grow into.” However, it’s not always the right move for a law firm. Carrying additional costs “just in case” is a substantial financial burden.

On the other hand, there is a risk associated with not having the right option for growth: too often firms that are trying to build integrated, cohesive practices find themselves housing new practice groups — exactly the ones they’re trying to integrate — on non-contiguous floors in their office buildings because more convenient space simply isn’t available when they need it.

The solution here, business-minded firms are discovering, is to negotiate flexibility for both growth and contracts, enabling them to reconfigure their footprint more quickly and with a better chance of adding adjacent spaces in a modular fashion as they need them or shedding unused space (and reducing costs) as necessary as well.

Terms

For law firms looking to take a more business-savvy approach to their real estate decisions, it’s important to focus first on terms — namely, the time horizon for potential business changes and the cost structure best suited to their current business model — and then work with a broker to find spaces that can accommodate those terms, rather than the other way around. In this context, it is critical to work with a broker who is conflict-free and whose allegiance is closely with the tenant. (The complex and often intertwined fiduciary responsibilities of various players in the commercial real estate market probably merit a legal journal article of their own.)

Having embraced the notion that the right space can create, or at least reinforce, the right firm culture, law firm leaders have been looking at real estate and evaluating it, first and foremost, for its physical properties. As the market evolves, though, forward-looking and business-minded partners are recognizing that it’s the business that enables the culture: after all, it’s hard to be collegial, even in the coolest of in-house coffee bars, if your cost structure is untenable. 

Source Article: Law 360