Sluggish office leasing activity has been getting a welcome lift from the legal sector as firms took a record amount of space last year to reaffirm their commitment to in-person work.
That momentum is extending into 2024 as law firms sign on for more space.
The industry collectively signed on for just shy of 17 million square feet nationally in 2023, according to a recent report from the brokerage Cushman & Wakefield, an assertive rebound from the earlier years of the pandemic when law firms were pulling back on deals or hesitant about taking on new space. The burst of new leases has also pushed the legal sector to the forefront of the national office market as other industries remain wary about making long-term commitments to their real estate.
With the tech industry pulling back on expanding their office portfolios and government offices slow to enforce return-to-office policies, law firms stepped up to account for roughly 9% of all office leasing activity last year in the country's largest legal markets, according to Cushman & Wakefield, which includes areas such as Boston, Atlanta, Chicago, New York and Philadelphia, among others. That's almost double the less than 5% share law firms accounted for in 2022, said John McWilliams, a senior research analyst at Cushman & Wakefield.
"The legal sector was a bright spot for office demand last year with an unprecedented level of leasing activity taking place," McWilliams said in a statement to CoStar News.
A majority of those leases are far smaller than the blockbuster deals tech giants such as Meta and Alphabet's Google signed in the years leading up to the pandemic. However, the legal industry's willingness to commit to space for the long term has underscored the value firms are putting on in-person work as well as their interest in some of the newest, top-tier properties that have recently hit the market.
Just this week, national law firm Butler Snow confirmed its plan to relocate from downtown Nashville, Tennessee, to a new development a few blocks away. The firm signed a 31,000-square-foot deal for the top two floors of a recently constructed office tower in Germantown’s Neuhoff District, slightly less than the roughly 46,000 square feet it had been leasing in the Pinnacle at Symphony Place property.
“After a lengthy search, we concluded that Neuhoff was the best fit for our firm’s future,” Chris Maddux, Butler Snow’s firm chair, said in a statement. He added that the new development would provide "elevated" space for its employees and clients, a sentiment echoed by other tenants across the country in relocating from older properties to newer and nicer spaces nearby.
Several law firms in Denver have already signed on to help fill the city's Block 162, a 30-story tower that has already filled about two-thirds of its nearly 597,000 square feet of office space in large part due to interest among companies in the legal sector.
In New York, Paul, Weiss, Rifkind, Wharton & Garrison signed the city's largest office deal of 2023 when it moved its headquarters to about 765,000 square feet across 18 floors at 1345 Avenue of the Americas as part of a 20-year deal. Davis Polk & Wardwell, another Manhattan firm, signed the second-largest deal when it decided to renew its lease at 450 Lexington Ave.
Moving Forward
To be clear, the legal industry alone won't be enough to prop up the country's sagging office market.
New leasing volume is still down by about 15% compared to levels reported in 2019, according to CoStar analysis, and the deals that are being signed are roughly 20% smaller. That has all contributed to a vacancy rate that has soared to a record high of nearly 14%, a figure unlikely to drop anytime soon as tenants continue to offload more space than they're willing to take on.
Even so, the legal industry's recent leasing spree is an optimistic example of companies that have balanced the impact of flexible work policies with their need for — and willingness to invest in — physical space. Tenants in the legal sector have also been at the forefront of implementing stricter in-office policies, according to a recent CBRE survey of law firms across the United States. What's more, the survey found law firm executives are looking to boost attendance rates even higher throughout the rest of this year in a move that could generate more demand throughout the foreseeable future.
Law firms are already reporting office utilization rates of more than 50%, according to the CBRE survey, even among firms that still allow for some form of hybrid work.
Among all of the leases signed by law firms last year, brokerage Savills found that nearly 46% of them represented expansions, a spike compared to the nearly 29% reported in 2022.
"Law firms are continuing to put value in office space as part of their recipe for being successful," Tom Fulcher, chair of the legal practice group at Savills, said in a statement. "It feels like we’re establishing the new normal in terms of [which industries] want to work in the office or remote, and those things are calcifying into what it’s going to be moving forward."