As with any industry, demand for law firms begets revenue and profits, and they govern the need, and willingness to pay, for office space. According to a Thomson Reuters review, the outlook for law firms isn’t on the sunny side of the street.
“The fourth quarter of 2022 saw law firms at their weakest point, year-over-year, as they measured up against the heights of Q4 2021,” the report said. “This mismatch resulted in the Law Firm Financial Index (LFFI) dropping to a new all-time low score of 30 in Q4 2022. Combined challenges to revenues, productivity, and expenses have nearly eaten through the record profit gains of 2021.”
Those challenges have included rising interest rates, geopolitical and economic instability, and transactional demand falling from the 2021 Q4 peak. Instead of demand growing 3.6% in the first quarter of 2022 compared to the same period in pre-pandemic 2019, there was a 0.2% drop in Q4 2022 compared to Q4 2019.
Then, on top of it all, law firms did strong seasonal hiring, so productivity was down 7.2%, “a quarterly decline equal to the depths of the pandemic lockdown.”
The final kicker is that there have been signs thing are improving, “firms’ return-to-office plans threaten to hamper” reduction of overhead expenses.
Firms are trying to address this by increasing fees, but some firms, especially at the larger end, are pushing “shocking” hikes, as The American Lawyer reports. And as it reported about the Thomson Reuters analysis, “But relative to Q4 of 2021, every single practice area tracked in the report had dropped, with M&A (-16.6%), real estate (-11.5%) and tax and bankruptcy (-10.3%) taking the biggest hits. Corporate work (-6.4%), IP (-2.5%), labor and employment (-1.3%) and litigation were also down relative to 2021.”
Big firms have been interested in shrinking their office space use since at least 2017, as a Wall Street Journal report from the time shows.
By the third quarter of last year, law firm lease signing was strong, according to Savills, but a majority of leases are relocations into newer Class A buildings.
“While firms are keeping significant footprints in core law firm markets, they are also moving into new cities that previously had little to no Am Law 100 presence,” Savills wrote. “The legal sector has been very thoughtful in its real estate strategy and firms are looking to ensure that they have a foothold where their clients and employees are located after the labor migration caused by the pandemic. Markets booming with new moves include Miami, Tampa, Salt Lake City, Austin, Houston, and Dallas.”
With economic pressure also at play, there is potential for significant shifts in law firm office usage.