Law Firms Manage Office Expense

Managing office expense in a turbulent economy

Our economy is in arguably the most challenging time since the Great Depression.  Each day the newspapers bring more bad news.  Companies as large as GM or AIG to as small as the local florist or neighborhood restaurant are being affected and are having to make adjustments to survive this downturn.  Law firms are making dramatic changes as well.  Layoffs, salary changes and in some cases departure of the firm completely are commonplace.

Sometimes with despair comes opportunity.  After salaries, office rent is more than likely the next largest expense item on a law firm’s books.  I am hoping to shed some light on the opportunities that exist in today’s commercial real estate market for law firms hoping to trim their overhead without trimming staff or attorneys.

First, as a matter of background, I have been an active tenant representation commercial real estate broker in the east bay for the past twelve years.  I have worked with dozens of law firms on lease renewals, physical relocations and renegotiations.  I have worked through a similar downturn after the dot com crash and I feel there are some significant parallels and opportunities that can be related to today’s market.

‘Numbers don’t lie’

Vacancy for Class A office space in San Francisco, Oakland and Walnut Creek/Pleasanton currently range between 13%-16%.  These vacancy rates have risen year-to-year at least 15%.  The outlook moving forward is more than likely less dramatic, potentially increasing another 5% or so.  However, activity and net absorption in the market is off significantly.  In time, this will result in rental rates declining.  Some premier downtown locations have held their rates fairly firm (5%-10% year-to year decrease).  However, the outlining markets have been hit the hardest (20%-30% decrease).  Our forecast for the remainder of 2009 and moving into 2010 is that aggressively priced sublease space will continue to drive the market’s activity and that landlord’s will progressively lower their rents and negotiate more flexible deal terms to meet the demand.

‘Flexibility’

In order to keep up with a falling economy, landlords are ‘stretching’ to make, or renegotiate deals.  Many law firms have been successful in renegotiating leases with substantial term remaining  .  Outside of rent, firms have been able to negotiate  a reduction in square feet leased, an adjustment in expenses passed through, and additional tenant improvement dollars.  The success of these types of renegotiations is largely tied to term remaining on the current lease.  .  Our experience has shown that tremendous flexibility can be achieved up to eighteen to twenty-four months prior to lease expiration.

‘Relocation’

The most aggressive deals in the market are being made with tenants that are willing to relocate.  There is an abundance of sublease space on the market that often offers a tenant both a private office intensive build-out and might also include phone systems, office furniture and computer wiring.  Typically, furniture, fixtures and equipment are at a tenant’s expense, but in the case of these subleases, these are often included in the deal, making it a truly “plug and play”.  Free rent has also become  a highly effective negotiating too.  It is not unusual  to see six to twelve months of rent free occupancy included in deals that are five years or greater in term.  Recently, we have negotiated parking in downtown office buildings at either a large discount or in some cases, free.  All of these factors add up to significant overhead savings for the typical law firm.

The Commercial real estate market ebbs and flows with supply and demand.  The office market is currently in the low point of a cycle and it looks like this low could stretch for at least the next eighteen to twenty-four months.    The specific data points to any one deal are uniquely relevant to each tenant’s situation, creating fantastic opportunities for law firms to capitalize on this timing..  It is prudent to understand where your firm currently stands in relation to the rest of the market, and to explore the possibilties, whether the ultimate goal is to stay and renegotiate, move to a new location or to re-evaluate current lease terms.