Prestige, Short Commutes Drive Law Firm Leases
March 4, 2011
By Adam Weintraub

George Fox, senior vice president and branch manager at Studley Inc., helps tenants find office space in a tricky and shifting market.

Fox has been in the commercial real estate industry for 18 years, seven of those at Studley Inc. His company specializes in locating space for law firms and tech. His team completed 34 deals with a total value of more than $80 million in 2010.

In the last decade and a half, Fox has seen the market go through its cycles, and watched clients change their approach to space. What he hasn’t seen lately is much improvement in the jobless rate. That has given tenants the upper hand when negotiating for office space, with vacancy rates still recovering in the speculative office market.

The interview with Fox was edited for space and clarity.

Q: Tell me about Studley.

A: I opened the Studley Inc. office here about seven years ago. We represent semiconductor companies, software companies and law firms. We work in the office and research and development space, but I’d say the majority of our focus is in the office sector.

Q: Describe the different geographic needs for law firms.

A: If the focus is on law firms, the majority are in Palo Alto and Menlo Park, a few in Redwood City and Mountain View, but these markets are very tight on the peninsula and loosen up as you go south. In North San Jose and downtown San Jose, in the East Bay — meaning Fremont and Milpitas — you have tremendous vacancy. Cupertino gets tighter. Los Gatos is very tight. They get tighter as the markets get smaller, and most of those markets are close to where executives live.

Q: So where executives live drives leasing?

A: It’s not purely driven by that. A lot of companies want to be in a prestigious location, and Palo Alto and Menlo Park are known to an international audience. Clients try to minimize commute issues for employees because they want to retain and attract top talent. But often you’ll still find that decisions are driven by the senior executives and where they live.

Q: How does the disparity affect rents?

A: Rents in, say, Menlo Park and Palo Alto are typically above $3.50 triple-net (taxes, insurance, and maintenance) per square foot per month. In downtown Palo Alto, you have rents above $4.50 to $5. Morgan Stanley took about 14,000 square feet at 245 Lytton in Palo Alto where the estimated comp is $7 triple-net. Which is a much higher number than I would ever advise a client to take, but if that’s where they want to be, that’s where they’re going to be. The vacancy rate in downtown Palo Alto is probably 3 percent (versus the mid- to high 20 percent range in downtown San Jose). It’s a really good location, probably the most sought after in the region. Menlo Park is a close second. The rents up on Sand Hill, as an example, are usually up above $7 triple-net. But if you went into downtown Menlo or Marsh Road, you’re looking at rents that are more like $2 to $3.50.

Q: Is the market thawing?

A: Companies have moved to nicer space, but they’re not necessarily taking more space. Prices have come down to a point where they can afford the nicer space. Large transactions in the third and fourth quarters of 2010 created some buzz that maybe the market is coming back, and there is cautious optimism, but the unemployment rate is barely trickling down. It’s not enough to make a dent in vacancy. Google, Facebook, companies like that continue to hire, but they’re few and far between. At some projects the debt is just too high, so landlords will either eventually lose the project or have to restructure their debt to do something closer to market price.

Q: Are you still seeing the short leases that were common when the downturn hit?

A: Terms are typically shorter. It is still a tenant market, so tenants should be able to negotiate a termination or reduction options. Because who knows who is going to be acquired? Who knows who is going to be the acquirer? Companies just don’t know anymore where they will be in 12, 24 or 36 months. So we’re typically advising shorter-term transactions until people have a really good sense of where their company’s going to be.

Q: You mentioned that the law firm sector is changing. Can you explain that?

A: Landlords are getting more savvy and doing their due diligence on a law firm’s history and understanding how the legal sector has consolidated during the last few years. And law firm demographics are changing. The firms are very interested in saving money because the baby boomers are starting to think about retirement and younger decision makers are focused on protecting cash. Firms are occupying space differently than they have in the past — at least many are trying. Attorneys are doing more with a lot less, so the ratio of attorneys to secretarial workstations is diminishing. Firms in the old days ran between 700 and 1,100 square feet per attorney; many firms now are focused on getting that number down into the 450 to 600 range.

But at the end of the day, they still want the right location for the right image. We put McDermott Will & Emery in roughly 80,000 square feet. They moved into a building with a cafeteria, a workout room, ample areas for employees to have large meetings. They used to have to do those things off-site. They were in about 60,000 square feet and growing. The costs are roughly equivalent. We were able to get the old Heller Ehrman LLP space at 275 Middlefield Road in Menlo Park — an international firm that went belly-up. It was basically plug and play; there was very little, if any, capital contribution out of the firm’s pocket other than rent.

George Fox
Title: Senior vice president and branch manager, Studley Inc.
Age: 44
Residence: Saratoga
Education: B.A. in political science and criminal justice, San Jose State University

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