How the most sophisticated law firms are approaching the use of office space

Transcription

1 How the most sophisticated law firms are approaching the use of office space While nothing will replace the traditional real estate cliché that it s all about location, location, location, today law firms real estate also needs to be about flexibility, flexibility, flexibility. In many cases, major corporations and law firms attempt to promulgate long-range, 10-to-15-year plans for their office space needs. The common result of these plans is that they can rarely, if ever, stand the test of time. In fact, most of the plans are not even workable within two years. Accordingly, sophisticated companies and law firms that are looking to their future office space requirements understand that more than ever before they need to focus on attaining maximum flexibility. When your office location is adaptable to a business environment that is evolving rapidly on many levels, you need office space that ensures your real estate investment today will continue to be a desirable workplace tomorrow. Here in Southern California, the legal community is responding to five underlying drivers in its approach to office space design. These influencers include: 1. Flexibility 2. Evolving business trends 3. Technological advancements 4. Generational/cultural shift 5. Market trends The smartest law firms will plan for the future by negotiating early in the process, at the RFP stage, for: Rights to renew on all or a portion of its premises with a realistic definition of fair market rental rate Solid expansion rights Early lease termination rights Early contraction rights, and Greater protection on rights to assign and sublease. Let s take a closer look at the most important considerations for your Southern California law firm today. Evolving business and geo-economic trends Throughout the legal services sector, from AM 250s to regional firms, law firms are experiencing increased competition and fewer exclusive clients. Clients are viewing many legal services as commodity work. Client-driven cost controls are exerting downward pressure on profit margins, and have resulted in an increase in fixed-fee assignments and negotiated or discounted billing rates. Client reluctance to pay an associate s six-figure salary for document review has forced an increasing number of firms to outsource these services and engage contract attorneys. Today, only 15 of the Fortune 500 choose to make the Los Angeles Basin their home Our regional business climate is no longer as attractive as it once was. Los Angeles, and California in general, are no longer perceived as a business-friendly environment, and correctly so. As recently as 2010, the Los Angeles metro area was the headquarters location for 23 of the Fortune 500 firms. Today, only 15 of these companies choose to make the L.A. Basin - Ventura, Los Angeles and Orange Counties -- their

2 The most obvious change in law firm design has been the separation of the law firm s public space from its practice space

3 Cultural changes The generational shift has brought about a cultural paradigm shift that will continue to affect the manner in which law firms deliver legal services and will have a corresponding effect on workplace design. Partners and senior administration, who are usually Baby Boomers, and junior partners and associates who are generally Millennials, work and interact in distinctly different ways. While Boomers are comfortable working in their offices on their own, Millennials tend to prefer a more collaborative workplace environment and more varied venues. Thus, the spaces each group utilizes are another point of divergence. Boomers tend to limit their use of space within the office footprint to two areas, the individual s office and the firm s conference rooms. Millennials, on the other hand, tend to use four areas: their individual offices, conference rooms, teaming rooms, and the lunchroom. home. For those that stay, tourism and hospitality rank among Southern California s top industries, and the entertainment sector, in the form of film, television, and music production, remains our best-known industry. California has always been known as an incubator of new ideas, new products and entrepreneurial spirit. The growth in the number of start-ups in the technology-focused Silicon Beach area, Santa Monica south through Venice, is proof of this. But start-ups, although they create an exciting business environment, remain dependent upon their VC funding. Until this sector of the economy realizes its potential and transitions to real profits, these young companies are hard-pressed to pay the billing rates charged by AM 250s and large regional firms. Technology Advancements in technology have had a meaningful impact on modern law firm design. Digital filing has dramatically reduced the need for onsite paper storage and records centers. Where four to five years ago it was common, it is rare indeed today to see a new law firm plan that includes rolling or high-density filing systems. Younger attorneys also demonstrate an enhanced level of concern for quality of life, driven by the often-expressed desire to achieve a balance between their professional careers and personal lives. Many of the new generation of attorneys are motivated more by interesting assignments, a sense of achievement, and the ability to collaborate, and less motivated by the future rewards associated with the partnership track. Increasingly, concern for environmental issues ranks high among young attorneys, and is resulting in more sustainable, green design of interior improvements. Use of recyclable construction materials and furniture systems composed of recycled products will continue to grow. When push comes to shove, however, the attorneys who truly want successful careers in major law firms will recognize that nothing succeeds like high quality product and very hard work. Over the long run, the most successful firms will be those that enhance the workplace environment to enable attorneys and staff to work long hours and produce top quality work. Changes in law firm design The most obvious changes in law firm design, brought about by this combination of business trends, technological advancements and cultural shifts, has been the separation of law firms public spaces Across the spectrum of firms, libraries have shrunk by as much as 75% to 100% The law library has become obsolete, as resources become instantly available on the Internet. Enhanced online research capabilities, coupled with the demonstrated preference by the young generation of associates to access and assimilate information electronically, have greatly reduced the need for the significant amount of space that once had to be dedicated to paper libraries. Across the spectrum of legal firms, libraries have shrunk by as much as 75 to 100 percent. We will continue to see a reduction in space dedicated to libraries; where practice collections are necessary, they will be located in interior case rooms dedicated to specific practice groups.

4 from their practice spaces, along with a new flexibility that is key to the planned uses of spaces in law firm design. The public conference center that features upgraded finishes and enhanced amenities for clients and visiting attorneys serves as a branding platform for a law firm and its culture. The percentage of space dedicated to conference centers will depend on the composition of practice groups and whether the office is the firm s headquarters or a regional location (law firms try never to use the word branch ) of an AM 250. Conference center capacity will range from a low of one seat per attorney to as many as two seats per attorney, with local offices of AM 250s trending toward the higher number due to the need to accommodate visiting attorney needs. Some full-floor and multi-floor firms are moving their lunchrooms and dining areas from the interior space to the window line, and incorporating a touch-down lounge, both adjacent to the conference and reception area. Some multi-locational firms have pioneered incorporating the touch-down room concept in their space design. Featuring refreshments, wireless connectivity, and flat screens streaming live news channels, these interior lounges allow attorneys to park visitors and clients in a comfortable and productive environment before or after a conference or a meeting. Adding flexibility, the kitchen is no longer built as a lunchroom for staff only, but is being developed as the firm s multi-purpose family room. As in many homes, the kitchen has transitioned into the central gathering place for both attorneys and staff, with more and varied uses throughout the day. In the morning and afternoon, these family rooms are places for attorneys to meet. During the noon hour, they are frequented by both administrative staff and attorneys, and in the evenings, they serve as venues for social gatherings and communal, overtime meals. To capture a more inviting, coffee house like character, some larger firms are outsourcing coffee and food services to popular, nationally recognized vendors. The millennial generation s fluency with computers has further shifted the staffing requirements of law firms. Attorneys are drafting, cutting and pasting their documents, thereby affecting the traditional role of administrative support. Once common was a secretary to attorney ratio of two to one. Today larger firms are more likely to be running at a ratio of 4 to 1, and trending towards 6 or 7 to 1. At the same time, paralegal to attorney ratios have gone in the other direction. In mixed practice firms, a 9 to 1 ratio was fairly standard; current ratios are closer to a 6 to 1 mix. The greatest impacts on how a legal firm utilizes interior space have been advances in technologies that serve the practice of law As enhanced connectivity via technology facilitates the interactions that help tie a firm together, it also allows individuals the flexibility to work from different locations. JLL recently represented two full-floor firms in long-term leases that programmed the design of their new suites to provide the ability to telecommute for as many as 10 percent of their

5 attorneys. Despite of this micro-trend we do not anticipate that hoteling, i.e. providing office space to employees only on an as-needed basis, will occur on a wide scale within the legal services sector. As is the case with accounting firms, the trend for most law firms is for attorneys to be out of the office for as much as percent of their time to provide meaningful benefit. The greatest impacts on how a legal firm utilizes interior space have been advances in technologies that serve the practice of law. As firms no longer dedicate large portions of space to libraries or paper file storage, and as perimeter window lines continue to be utilized for conference rooms and attorney offices, the real question is: -How do we repurpose and make effective use of a floor s interior space? In the past, traditional law firm design provided window offices for attorneys, paths of travel by secretarial stations, and, through to the core of the building, spaces for file storage and various support functions. Based on that operating model, a 45-foot depth from building core to window line was considered ideal. A logical reason exists that explains why large portions of the high-rise buildings in the Los Angeles CBD were designed with floor plates that measured 25,000 square feet. [Note: Based on the revised Building Owners and Managers Association (BOMA) s standard of measurement, that same floor has now grown to nearly 28,000 rentable square feet.] When law firms lease space, one key analysis is to compare the net effective usable square feet in a building under consideration. In higher-priced markets such as Washington D.C. and New York City, firms are increasingly using the interior portions of a floor for first- and second-year associates offices. Provided that both exterior and interior offices have glass walls that allow sufficient exterior light to penetrate the floor, this design scheme is proving to be popular. We have yet to see it in Southern California, but it s safe to assume we will in the years to come. Another coming design concept that, although it is discussed regularly, has not yet gained traction in Southern California is the one-sizefits-all attorney office. One-size offices are common in Australia and London, where full-service rents bump up against $ per square foot, putting stress on the bottom line. Office size has generally been perceived in Southern California as compensation to senior attorneys. The senior partners of two important Los Angeles law firms have endorsed this design direction, but only two or three firms in the Los Angeles CBD have yet successfully embraced the single-sized office design. We believe that the concept has significant merit, and will be implemented with increased frequency. Individual offices for partners and associates will become smaller. The benefits to the firm include reduced occupancy costs due to a smaller footprint, enhanced flexibility in expanding and reducing the size of practice groups, and the elimination of periodic capital cost expenditures by obviating the need to relocate or resize offices for attorneys as they transition to partnership. Downtown Los Angeles market trends With rare exception, AM-250 s and large regional law firms within the Los Angeles basin are located in the Los Angeles CBD and Century City submarkets. The Class-A sector of L.A. s CBD comprises 21 institutional high-rises offering a total of 21 million square feet of office space. Within that core are located 67 AM-250s and 41 non-ams that occupy more than 10,000 square feet. These 108 firms lease a total of 5.1 million square feet, or 25.8 percent of the sector. With a year-end total of negative 69,551 r.s.f., 2014 marked the seventh consecutive year that the Class-A sector of the CBD office market posted a negative direct absorption. During the 84-month period from January 2008 through 2014, tenants vacated a total of 1.5 million square feet of space, representing a reduction of some 7.2 percent of the million square foot institutional sector. Direct absorption - Downtown (Class A) 1,000, , , , , , , , ,000-55,054-69,651-23, , , , , , , ,

6 The greatest impacts on how a legal firm utilizes interior space have been advances in technologies that serve the practice of law

7 The question is - why? And the answer is - capital costs Firms have generally been reluctant to invest the capital dollars necessary to affect the efficiencies associated with modern law firm design. Recent exceptions to this trend include Morrison & Foerster s, Anderson, McPharlin & Conners and Meyers Nave s relocations to AON Center, and White & Case s move to City National Bank Plaza. Both Morrison & Foerster s and White & Case s multiple-floor relocations resulted in significant reductions in occupied space. The fact remains that to design, build and furnish law office space is expensive. Hard and soft costs from a core & shell configuration can run $ to $ per rentable square foot. JLL s contemporary experience shows that modifying even already improved space may exceed $ per square foot. Recent implementation of the more stringent Title #24 energy efficiency requirements will push these costs as much as percent higher. When a firm considers a ten-year lease within the Class-A sector, its tenant improvement allowance today will be in the range of $65.00-$85.00 per square foot. Depending on the firm s design standards, this translates into an out-of-pocket capital expenditure of $50.00 to $ per square foot. Based on Q full-service rents of $36.00-$45.00 per square foot per year, relocation capital costs can represent anywhere from 16 to 40 months of rent. Granted, some of these costs will be offset by rent abatement. However, unless a firm is absolutely confident with its long-term position in Los Angeles, and, importantly, comfortable with the inherent flexibility of both its space design and its lease, that firm will find it challenging to commit to this significant level of investment. About the authors Mike E. Meyer is a partner with DLA Piper and Chairman of the Los Angeles office. Mr. Meyer has developed a national reputation as one of the preeminent leasing attorneys in the United States, and regularly represents many of this country s leading financial institutions, accounting firms and law firms in connection with major lease transactions throughout the country. Tom McDonald is an Executive Vice President in JLL s downtown Los Angeles office. Active in the commercial real estate industry since 1979, Mr. McDonald s core practice is the representation of corporate and professional firms in the acquisition and disposition of office facilities in the Central Business District and Tri-Cities markets.

8 For more information contact: JLL 515 South Flower Street Suite 1300 Los Angeles, CA Tom McDonald Executive Vice President About JLL JLL (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4 billion, JLL operates in 75 countries worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3 billion s.f. and completed $99 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets under management. For further information, visit Jones Lang LaSalle IP, Inc. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of Jones Lang LaSalle. The information contained in this document has been compiled from sources believed to be reliable. Jones Lang LaSalle or any of their affiliates accept no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this document