The National Pulse

Moving on Up


Greg Evans, a busy San Francisco commercial litigator with Orrick, Herrington & Sutcliffe, doesn’t need much art in his corner office to make a statement. He’s got the “O.”

Outside his seventh floor window, which has a view looking north to the city’s Financial District blocks away, is a large green “O,” some seven feet in diameter, and the word “Orrick” underneath.

Orrick got the right to name the building and put its distinctive signage on its modern gray green sheath when it moved in last year. The firm took 165,000 square feet on five floors, making it the largest commercial lease inked in San Francisco in 2003. Noteworthy for local market watchers was that the firm, which had occupied the old Federal Reserve Bank Building, listed on the National Register of Historic Places, moved south of Market Street to an area popularized by dot-com technology companies and now home to the state’s new stem cell research headquarters.

Orrick isn’t alone in commanding sway in the commercial real estate market. Law firms are among the most desirable commercial tenants in competitive markets across the country.

“Law firms are the growth engines in these markets,” says Melissa Copley, Chicago-based managing director of tenant representation for the global law firm practice of Jones Lang LaSalle, a real estate services firm. “They are among the most coveted tenants out there. They are large, and growing, as opposed to organizations that are shedding space and downsizing.”

Several factors play into the trend, she says. This has been a jobless recovery, with many industries still laying off employees. Meanwhile, law firms are growing, boosting their desirability and clout as tenants, Copley says.

In addition, spurred by the conventional wisdom that the market will be controlled by a small group of national firms, many firms continue to open new offices in New York City and Chicago, and on the West Coast. Indeed, many well financed firms used the bust to move into new markets and snatch antsy partners and available space.

Finally, the continuing trend of law firm mergers means that firms need new space—they want everyone under one roof, at one address.

All this means law firms looking for more than 20,000 square feet are sought after and courted like a law review editor during recruiting season.

From a landlord’s perspective, there’s nothing like a law firm when you need an anchor tenant, real estate experts say. Firms hold such sway that many are looking at alternative space even though their leases are not close to expiring, knowing that in many cases they can get the new landlord to assume the prior lease. Law firms, Copley says, “have a lot of wonderful options.”

Blockbuster Deals

As firms grow and need anywhere from 100,000 to more than 500,000 square feet, often the only option is new construction. Moves of such magnitude cause seismic shifts in local real estate markets. News broke in June that Kirkland & Ellis would move from Aon Center in Chicago to a new tower on North LaSalle Street, on the downtown’s west side. The deal made big real estate news in the Windy City. The lease, for 600,000 square feet, is one of the largest in the city’s history, the Chicago Tribune reported. (Kirkland & Ellis would not comment at press time, saying a lease had not yet been signed.) In Manhattan, the country’s most expensive real estate market, law firms have been the most active tenant group this year, according to a report by Studley, a New York City-based real estate management firm.

Last year, law firms placed a close second to financial services companies in signing leases for Manhattan office space. Most are in Midtown, close to many of their clients, but a growing number are relocating to or expanding downtown, including Cadwalader, Wickersham & Taft, which leased 460,000 square feet at 1 World Financial Center. This year’s largest law firm lease to date is also downtown, where Fried, Frank, Harris, Shriver & Jacobson took 380,000 square feet at 1 New York Plaza, according to the Studley report.

Most firms rely on tenant representatives, like Studley and Jones Lang LaSalle, to steer them through the process. But some firms elect to go it alone, such as Mayer, Brown, Rowe & Maw did in its recent move to a new Chicago high-rise. Real estate partner Alvin Katz handled negotiations in the move to South Wacker Drive.

The firm began looking in early 2001. For some two years it took up half his professional time, says Katz. The firm decided that only new space could give them everything they wanted: plenty of windowed offices, lots of amenities, modern subfloor wiring and a single elevator bank to promote interaction among lawyers.

“Our old building was a beautiful Philip Johnson design, a postmodern architectural temple,” Katz says, “but when that building was designed, my secretary was using an IBM Selectric. When she got one where the ball moved in both directions, folks would stop and gape,” he says.

Big Firms in Driver’s Seat

For some firms, a move means a rise in rent—Kirkland & Ellis’ net rent will reportedly double from the $13.67 a square foot it pays at the Aon building.

But law firms are such desirable tenants they can often negotiate extras. Some are able to pick up perks without even moving. Take Katten Muchin Rosenman, which completed what Copley calls a “restack” of its Chicago office last year.

Katten Muchin’s lease was coming up and the firm was in negotiations to anchor a new building. But its current landlord offered a deal the firm couldn’t refuse. The landlord renovated the space, built a new state-of-the-art conference center, rewired the building (which lowered the firm’s occupancy costs) and lowered the rent, says Copley, whose firm represented Katten Muchin in the transaction.

Such concessions are key, and can add tens of thousands of dollars to partners’ annual draws. Rent is traditionally a firm’s second largest cost, next to salaries.

Some tenant representatives, such as CAC Group’s John Giordani in San Francisco, are urging firms to assess their situations now, no matter when their leases are scheduled to expire. Vacancy rates in strong markets like San Francisco, New York City and Washington, D.C., are expected to decline, which means rents will be going up. Law firms have certain common needs, such as wiring for the latest technology, 24/7 heating and air conditioning and, increasingly, security and secured parking, especially for employees working nights or weekends.

And all law firms want flexibility, Copley says, including the ability to expand and contract or get out of a lease because of a merger.

But after that, their needs diverge. Some like marquee addresses and believe it enhances their image; others believe pricey locations are a turnoff to clients. Some will refuse to be in a building that houses a competing firm; others will refuse to take floors beneath a competitor.

Joe Malkin, managing partner of Orrick’s San Francisco office, says the firm considered other space, including the iconic Bank of America office tower, which he called “a gorgeous building with gorgeous views.”

But Orrick wanted to be an anchor tenant, with naming rights to the building, room to expand and, presumably, preferential treatment from its landlord.

The Old Fed building is still vacant. And Katz says there are no takers on the space his firm vacated in Chicago. “I heard they were going to make it into a spa, or a hotel,” Malkin says of the Old Fed. “There are a variety of rumors.” But no takers with the cachet or clout of a law firm.


Correction

In "Moving on Up," September 2005, page 12, Studley was incorrectly identified as a real estate management firm. Studley is a brokerage firm specializing in tenant representation. The Journal regrets the error.

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