Law firms the bright spot in a 'tepid' office market

Despite sluggish demand for office space in both Los Angeles and San Francisco, there's an emerging bright spot for landlords: law firms. Legal tenants, both large and small, are committing to premium space and taking advantage of market conditions to lock in longer lease terms, going someway to softening the dual blow of rising vacancies and interest rates.

"Law firms are the most sought-after tenants in the market because of demand. Law firms are doing transactions, but they're also doing transactions with term, which is the most attractive thing to landlords," said CBRE executive vice president Jeff Welch, who regularly acts as an advisor to law firm tenants.

Office attendance policies, instituted by several law firms, are the "stick" driving return to the office.

Firms are "committed to maintaining their culture," Welch said. This was distinct from what's happening in the technology and entertainment industries, where attendance had remained low following the pandemic, contributing to leasing activity overall being "tepid."

"Most of our managing partners of major law firms are very much committed to getting people back in the office as a way to retain culture ... They're the one of the lone industries that are putting their money where their mouth is. They're leasing space in the best buildings and investing in new build outs. And we're not seeing that across a lot of industries," Welch said.

The carrot has been new buildings and more amenities, he said, with good coffee and plentiful parking nonnegotiable for attorneys.

One of the biggest recent moves in San Francisco was Goodwin Procter LLP's commitment to a new space at 525 Market Street.

According to CBRE's latest San Francisco office market report, the Goodwin deal was the biggest new lease (rather than a sublease) recorded in the first quarter of 2024, clocking in at nearly 60,000 square feet. It's understood that the firm will be relocating from its current office at Three Embarcadero Center at the end of 2024. Website the Real Deal reported that the new lease is for 11 years.

A spokesperson for Goodwin said that the move was prompted by a desire to increase collaboration.

"Given the firm's lease at Embarcadero was expiring at the end of this year we did a strategic review of our current space and alternative locations which resulted in our decision to relocate to 525 Market Street where we will have the opportunity to build out and design new space to foster collaboration and creativity," the spokesperson wrote in an email.

Elsewhere in San Fransisco, Baker & Hostetler LLP renewed its lease for the entire 31st floor at 600 Montgomery Street, commonly known as the Transamerica Pyramid, for a further five-year term. That was despite the firm's first four years there being significantly disrupted by the pandemic.

"We had to decide what we were going to do," Robb C. Adkins, the firm's San Francisco managing partner, said, adding that the lease was due to expire in January 2025.

"In terms of lease space, we're a small enough office, we started with four attorneys, a staff and we're now at 20. We've grown five times our size or so over the last four years, but that makes it easy enough to talk with everybody as to what they wanted to do. And it was unanimous, they all wanted to stay in the Pyramid," Adkins said.

Part of that was down to the iconic nature of the building, which towers above the San Francisco skyline, but also due to its location in proximity to dining options.

A key concern when striking the new agreement was the desire to be "responsible" while allowing for future growth. Thankfully, the landlord was happy to engage in negotiations and the firm was able secure an option to lease a further floor, to either accommodate further desk space or for other "creative" ways to use it.

While the pandemic had forced firms to weigh up what they really valued in an office, having a footprint was still a key factor in attracting talent, Adkins said.

"We don't do expensive art, or things of that nature. But we did find that we want presence. First of all, we believe we need a presence in San Francisco, for our clients, and also to attract top legal talent, unlike some of our peer firms, we're newer and growing," Adkins said.

The fact that the building's landlord, SHVO, had committed to spending $1 billion to redevelop the building to incorporate more hospitality options, as well as restore the Transamerica Redwood Park, also helped sweeten the deal.

The firm did not have a set attendance policy but found that attorneys tended to prefer working from the office.

"Our expectation is that people will come in more often than not, which tends to be, for some people, that's three days a week, oftentimes, Tuesday, Wednesday, Thursday. I will tell you, there is a sizeable and growing portion of the office that does come in five days, if they choose to do that," he said.

Other notable leasing deals in San Francisco during the quarter were lease renewals by Winston & Strawn LLP and Fox Rothschild LLP, with the former decreasing its office footprint, according to the CBRE report. The overall vacancy rate there was 36.7% in the first quarter.

In Los Angeles, demand from the legal industry counted among the biggest drivers of leasing activity in Q1, though competition for space varied by location. Office footprints in downtown Los Angeles were shrinking, Welch said, in part due to perceptions about safety.

"I think that trend is going to continue until the environment in downtown improves, because what we're still talking about is three major impediments for attorneys: that is safety, amenities, and commuting," he said.

Despite this, firms were not moving from downtown entirely, with many firms opting for a two-office strategy. That was reflected in CBRE's latest figures for downtown Los Angeles, which showed law firms almost exclusively making up the list of high-profile lease transactions in Q1. Davis Wright Tremaine LLP, ArentFox Schiff LLP, Sanders Roberts LLP and Moon Law Group PC all signed new leases in Q1 according to CBRE, while Parker Stanbury LLP renewed its lease at 444 S Flower St.

The vacancy rate in the downtown Los Angeles market at the end of the first quarter was 28.8%. Legal services were responsible for 17% of leasing activity downtown during the same period.

The biggest beneficiary from this bifurcated leasing strategy was Century City, Welch said, a market attracting the most attention in California, if not the nation.

"Century City is, arguably, the hottest real estate market in the country. Period," he said.

He cited lease commitments from Paul, Weiss, Rifkind, Wharton & Garrison LLP and Willkie Farr & Gallagher LLP, both inked last year, as examples of this "flight to quality".

While Century City had done a better job of retaining a safe environment for attorneys, the primary driver for firms relocating there was access to clients, he said.

"They're looking for the most profitable work, and that's along the private equity and banking: the banking and private equity hub of Los Angeles is Century City. I think that's been a major driver. Safety [and] environment is key, but access to clients can't be underrepresented. It's extraordinarily important as part of the driver," he said.

A lack of new construction activity in Century City, and to a lesser extent in downtown Los Angeles and San Francisco, meant that competition for office space would likely heat up in the next five to 10 years, Welch said.