Changes In LA Law Firm Office Space Needs Open New Downtown Opportunities
The LA metro area as of 2019 ranked second in the nation behind only New York for the highest level of employment in the legal sector. Despite those high numbers, law firms in LA had been reducing their leased square footage since before the coronavirus pandemic began, because of record high office rents, limited Class-A availability and changes within the industry that affect the amount of space these firms need.
While many firms that are able to take a wait-and-see approach have been doing just that during the pandemic, others have taken advantage of a favorable market, experts say. These firms are major tenants in the LA neighborhoods where they cluster and, especially in Downtown, play a major role in the larger office ecosystem of the neighborhood. The pandemic has pushed many firms to see a variety of different ways work can happen and that could have big impacts for law firms’ traditional hubs.
Prior to the pandemic, law firms had been shrinking in terms of square footage leased, with “space efficiency” being the main real estate approach for major law firms across the country for at least the last 10 to 15 years, a February 2021 Newmark report found.
As happened across the office sector, leasing activity dropped off for law firms in 2020. In a sample of gateway markets nationwide, total gross leasing activity by law firms declined 41% between 2019 and 2020, according to the Newmark report, as many firms were hesitant to make a move in an uncertain time.
That sample included Los Angeles, which saw its total gross leasing activity by these tenants decline by 33% in 2020 from the year prior, said Newmark Research Director Bethany Schneider, the report’s co-author.
In Los Angeles, Downtown LA and Century City are LA’s dominant hubs for top law firms. These tenants take up a significant portion of the overall space available in these areas. In Century City, they take up approximately 2.7M SF of total office space or about 20%. In Downtown, law firms take up approximately 6.4M SF of office space, or roughly 30% of all office space in the submarket, according to data supplied by JLL. Any major shifts in the way law firms use space would likely have a noticeable impact on the submarkets.
So far, Downtown and Century City have seen pandemic-related trends in leasing play out with different impacts on the neighborhoods.
In Downtown, for instance, what was already a “somewhat anemic demand market” has seen the entry of about 500K SF of sublease space, said JLL International Director Tony Morales. The result has been good for tenants.
“Landlords [in Downtown] are being very aggressive right now, and they're more aggressive today than they were three months ago because they're seeing the market wake up. They're seeing people make decisions,” Morales said.
Downtown has seen some large lease renewals and new leases by law firms since the pandemic. Of the top five law firm leases since mid-March 2020, four were in Downtown, according to data from CoStar.
But even pre-pandemic, the area had high office vacancy rates, experts said. In Q4 2019, Downtown had a 16% office vacancy rate. In Century City, the market had been fairly tight leading up to the pandemic, with vacancy at just 3.7%, according to the Los Angeles Business Journal.
The two years leading up to the pandemic had seen strong leasing activity, Newmark Executive Vice President and Managing Director, Los Angeles West Steven Kolsky said. Roughly 20 law firm deals were completed with long-term leases totaling about 1.2M SF in Century City in the two years prior to the onset of the pandemic, meaning that many firms are locked in now. For that reason, Kolsky said, he didn’t anticipate a significant amount of law firm downsizing in Century City because so many firms had already inked their recent leases with rightsizing in mind.
As with other office users, law firms are still in the decision-making process about how to proceed with regard to their space needs and don’t seem to be in a rush to make long-term decisions as the pandemic is still ongoing. But many of them, “regardless of size or location, are now willing to ask questions and consider new ways of working that would not have been considered prior to the pandemic,” the Newmark report noted.
Cox, Castle & Nicholson partner Alicia Vaz said that prior to the pandemic, the firm was generally the kind of place where people come into work every day. But when the firm made the decision to switch to remote work, the transition was smooth.
As the year drew on, colleagues who had been skeptical that work could be done effectively saw evidence otherwise. Vaz noted that many large law firms had strong years financially in 2020. But, she said, colleagues who had been angling to work from home pre-pandemic saw its downsides.
Vaz, who is based in the firm’s Century City office, said that while she and her co-workers are still working remotely, the question of how and where they will work post-pandemic is still very much a work in progress and there are many trade-offs to consider. Expanding remote working could mean tapping into far-flung talent, but poses challenges to integrating them into the firm and maintaining company culture, for example.
At this point, “it’s sort of a week-by-week or month-by-month analysis of what we want to do,” Vaz said.