The Legal Tenant analyzed law firm transactions over 20,000 square feet (sf) across key U.S. markets and found that the legal sector seems to be back on course with steady quarterly leasing numbers since Q3 2021 – after a severe slump at the end of 2020 and a slow start to 2021. A total of 1.7 million square feet (msf) was leased during the quarter which is just over Q2’s leasing volume (1.6 msf), and the quarterly average for the last four years (1.6 msf).
Legal tenant leasing volume has held up, when other sectors such as technology – which were once the darlings of the pandemic, growing quickly and taking huge blocks of space as they anticipated continued growth – are now pausing amidst talk of an upcoming recession and waiting to sign new office leases. Major law firms, which typically sign leases of 10-15 years, don’t generally make their real estate decisions based on short-term economic conditions. As a result, firms actively in the market may benefit from a second headwind of instability in the marketplace as it continues to put pressure on landlords and creates extra leverage for tenants looking for space.
By the Numbers
Quarterly Leasing Volume
Leasing amongst the legal sector has significantly improved with multiple quarters hitting or just exceeding the four-year quarterly average of 1.6 msf. 2022 had a slow start to the year, which is not uncommon in office leasing, and the year-end total is set to meet or exceed 2021’s total volume. Annual leasing year to date is 4.3 msf, 79% of the way to reach the 2021 year-end total of 5.5 msf. Last year in Q3 2021, leasing levels jumped 37% due to a single lease of 662,400 sf completed by Kirkland and Ellis LLP in Chicago. Without that significant lease swinging the quarter’s leasing volume, Q3 2022 would be the largest quarterly leasing total since the start of the pandemic.
Notable Law Firm Leases Signed Q3 2022
In Q3 of 2022, there were ten leases over 50,000 sf signed. Five of these ten transactions represented expansions from the last lease or new office locations, three firms made no change to size, and two new leases were significant contractions O’Melveny & Myers LLP originally leased 355,000 sf in their last lease at 7 Times Square but had been contracting over time and was down to 150,000 sf before signing on for 142,221 sf at 1301 Avenue of the Americas. DLA Piper announced that it is adopting a “high performance flexibility” schedule and as a result is reducing its footprint by more than half.
Three of the top transactions were signed in New York City. In total, New York saw eight law firm leases completed in Q3 over 20,000 sf which made up over 0.5 msf of leasing activity for the quarter. The top transaction of the quarter was leased in Manhattan by Freshfields Bruckhaus Deringer US LLP in a 179,724-sf relocation to 3 World Trade Center from 601 Lexington Avenue. The move will put the firm in an office building built in 2018, that is two decades newer than the one it is leaving, in keeping with the recent flight to quality being seen in law firm transactions around the country.
Majority of Leases are Relocations, Driven by Flight to Quality
The Freshfields decision exemplifies a trend in which firms are choosing to relocate into newer construction. In Q3, 54.5% of leasing activity (by square footage) was made up of relocations. Of the 16 relocations that occurred, 11 of the moves, or 68.8%, were into newer Class A buildings.
At the height of the pandemic, the “stay versus go” pendulum swung heavily to “stay” as firms delayed decisions until more clarity surrounding the future of the workplace emerged. In 2020, relocations only made up 30% of leasing, however, in 2022, 64% of lease decisions shifted to “go” which is back on par with 2018 and 2019 leasing norms. Pre-pandemic, a low unemployment environment already had firms looking to upgrade their office locations and, amidst the current war for talent and a workforce that is favoring hybrid work, the flight to quality has been amplified.
Transaction Type Breakdown by Square Footage
2022 YTD Top 10 Legal Leasing Markets by Square Feet
2022 legal leasing is signaling a return to more normal dynamics, but where firms are signing leases has seen a substantial change. 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. 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.