The number of law firms and the total headcount of lawyers both have failed to keep pace with the growth observed in other professional and business service sectors, the majority of which have sharply rebounded in the wake of the recession. We suggest several reasons why the headcount of lawyers has stagnated over the past several years, and submit that the square footage currently occupied by law firms is likely to continue to decline over the next several years, though perhaps at a slower pace than has been the case recently.
As partnerships, law firms have always been mindful of costs, but what we’re seeing now is a true paradigm shift. Law firms as a group are, for the first time, really starting to question traditional assumptions about how they use space, who sits where, and how to maximize flexibility to prepare for what the future may bring for their business.
Overall, firms are feeling pressure to be more efficient. Private offices remain a necessity, but there is an emerging trend toward universal size for partners and associates with the distinction being made by creative furniture solutions that also facilitate easy adaptability of offices.
Law firms head count growth has been sluggish
The record high in office-using employment largely has resulted from the immense strength of the professional and business services sector, where employment is 7.5% above its prior peak at the end of 2007. However, not all categories within the professional segment have rebounded equally: since the end of the recession in June 2009, the number of employees at law offices, as measured by the Bureau of Labor Statistics (BLS), is unchanged and stands well below the count observed more than a decade ago (Chart 1).
Persistent weak employment at law firms could have a notable impact on major office markets (Table 1), particularly in those locales where law firm employment has typically comprised a sizable fraction of professional and business services employment. Compounding the problem are many law firms’ plans to decrease the space per employee, particularly in light of the fact that law firms have typically allocated one of the highest levels of square footage per employee1 among major users of office space.
Chart 1: National Employment by Establishment Type, Select Sectors
Source: CoStar and Savills Studley
Table 1: Largest Law Office Employment by County,Q1 2014 Average, Private Sector Only
Source: Bureau of Labor Statistics
Why has headcount at domestic law firms slowed?
We believe that there are three main reasons why domestic employment at US law firms has failed to echo the rebound observed in other professional office-using sectors:
- Merger and acquisition activity among law firms has led to fewer employees.
- Law firms have focused on growing internationally, rather than increasing their domestic presence.
- Revenue growth at law firms has slowed and prevented more aggressive expansion within the U.S.
Law firm merger and acquisition activity
While there are many reasons that U.S. law firm employment has contracted, we speculate that a lack of robust revenue growth domestically, in tandem with a focus on firms growing their international presence, has led to headcount growth that can only be characterized as anemic. As shown in Table 2, there have been several major combinations of law firms over the past year. Through the first five months of 2014, there have been 50 mergers or acquisitions of law firms according to ALM Media—more than half of the total number of combinations in all of 2013. The flurry of activity shows no signs of abating: last month, Bingham McCutchen LLP (800 attorneys) and Morgan, Lewis & Bockius LLP (1,400 attorneys) disclosed that they were in merger talks. (A full list of all law firm mergers and acquisitions over the past twelve months in shown in Appendix II.)
We suspect law firm mergers will continue to make economic sense, particularly given the savings associated with shared resources. According to the 2014 Law Librarian survey released by ALM Legal Intelligence, the average firm-wide library budget (including staff, print materials, electronic resources, online costs, etc.) has fallen from $5.8 million in 2009 to $5.5 million in 2014, likely led by a decline in librarian headcount.
Table 2: Major Law Firm Merger Announcements, Q3 2013 – Q3 2014 (to date)
Focus on international presence
Law firm headcount growth also has been muted due to an increased focus on international growth. Overall, the 250 largest U.S. law firms expanded their international presence by increasing their branch count across the top 15 global markets by almost 100 firms (13%) and by more than 5,000 attorneys (+25%) between 2013 and 2014 (Table 3). Even excluding tremendous expansion into Canada, the average growth in the number of attorneys is still a robust 23%.
Table 3: International Presence of National Law Journal's Largest 250 U.S. Law Firms
Source: National Law Journal
Slower Revenue Growth
A lackluster increase in U.S. law firm employment may also be resulting from sluggish revenue growth. While gross revenue for the top 200 U.S. firms has increased from $65.2 billion in 2005 to $96.4 billion in 2013 according to ALM Legal Intelligence—equivalent to a compound annual growth rate of 5%—the growth in average profits per equity partner for those same years has been substantially weaker, and stood at just 1.8% as of 2013. Moreover, a Census Bureau measure of total legal services revenue shows that total revenues fell in 2013 for the first time since 2010 (Chart 2). One driver of lower revenues has been the trend toward corporate clients performing work in-house; another has been the move toward alternative fee arrangements, which largely eliminates the “hourly rate” from the revenue equation. (Instead, firms bill on a contingency fee or fixed fee basis.) More clients are also asking for outright discounts on their legal bills when outside counsel is retained. The most recent Law Firm Leaders Survey (2013)2 shows an average of 60% of the surveyed firms’ top 50 clients receive a rate discount, up from just 47% the year prior.
Additionally, while some practice areas, such as merger and acquisitions advisory work, have been boosted by the economic recovery (Table 4), other areas are likely to have fallen amid an improvement in overall economic conditions, such as a reduction in corporate restructuring stemming from fewer bankruptcies (Chart 3).
Chart 2: Quarterly Services Survey: Total Legal Services Revenue, Year-Over-Year Percentage Change
Source: CoStar and Savills Studley
Table 4: Merger and Acquisition Activity (includes all announcements of US targets)
Chart 3: Number of Total Business Bankruptcy Filings by Quarter, SAAR
Source: U.S. District Courts and Moody's
On a national level, there is evidence that more and more lawyers are choosing to work outside of traditional law firms, as measured by the declining fraction of attorneys employed at “legal service” firms (primarily law offices) versus other types of establishments (Table 5). As such, growth in the number of attorneys at law firms has been even slower than growth in the total number of attorneys overall. Not surprisingly, first-year associate salaries have reflected the softness in law firm employment. According to a recent National Association for Law Placement (NALP) study, in 2009, about 90% of offices in Los Angeles and Washington, D.C. at firms with 700 or more attorneys reported first-year salaries of $160,000; in 2014, only about 40% of firms did so.
Table 5: Number of Lawyers by Establishment Type
Source: Bureau of Labor Statistics
Evidence of slow growth is borne out by the attorney count at some of the nation’s largest law firms. As shown in Table 6, attorney headcount at the five largest law firms in New York City, Chicago, Washington, D.C. and Dallas is flat over the last decade: the total count of attorneys at the firms shown in 2005 was 7,916, while in 2014, the figure totaled 7,892.
Table 6: Attorney Headcount by City at the Five Largest Law Firms (by Attorney Count)
Source: Crain's (local editions), National Law Journal, CoStar, Articles, Internal Data
Moreover, among the top law firms examined, none has expanded their footprint over the past several years. A review of total space per attorney3 shows that the majority of firms have shrunk, rather than expanded, their space on a per attorney basis (Table 7).
Table 7: Attorney Count and Occupied Space by Office and by Year
* In 2014 Hogan Lovells signed a lease for 385,000 SF that will commence in 2017.
** In 2014 Arnold & Porter signed a lease for 375,000 SF that will commence in 2015.
*** In 2014, Gardere Wynne Sewell signed a lease for 109,000 SF that will commence in 2016.
Source: National Law Journal, CoStar, Articles, Internal Data
The shrinking law office phenomenon is evident across other firms, too; the trend to allocate fewer square feet per employee more generally has played into a number of the space downsizings highlighted below.4
In New York:
- Paul Hastings announced a future move from 240,000 sf at 75 East 55th Street to 180,000 sf at 200 Park Avenue—a space reduction of -25%—despite the fact that they have no plans to reduce their attorney headcount. (In fact, ALM statistics show a current count of 231 attorneys, up from 215 in 2013 and 205 in 2012.)
- Weil, Gotshal & Manges recently renewed its headquarters lease beginning in 2019 for approximately 30% less than it currently leases. The firm intends to fit its existing employee base through a complete interior renovation scheduled to take roughly three years.
- Kaye Scholer just moved into 250,000 sf at the brand new 250 West 55th Street,5 leaving behind 330,000 sf at 425 Park Avenue, a -17% reduction in space.
- Troutman Sanders will move from the Chrysler Building at 405 Lexington Avenue to 875 Third Avenue next year, leaving 140,000 sf and taking 87,000 sf, for a space reduction of almost -40%.
In Washington, D.C.:
- Hogan Lovells renewed its lease earlier this month for -8% less space than they currently occupy.
- Arnold & Porter will move to 601 Massachusetts Avenue in its third reduction in as many years, having downsized from 485,000 sf to 425,000 sf (currently) to 375,000 sf with their October 2015 lease signing.
- Nixon Peabody, at the end of 2013, also announced a 2015 move within Washington, D.C. where the firm will cut its footprint by nearly -30%, from 92,000 to 65,000 sf.
- Sheppard, Mullin, Richter & Hampton completed its August 2014 move to 58,000 sf at 2099 Pennsylvania Avenue NW, down from the 64,000 sf it previously occupied. Even so, the firm plans to expand its attorney count from 60 to as many as 100+ attorneys over the next five years, increasing the number of offices from 70 to 90.
- Seyfarth Shaw has sliced its occupied space by one-third (from 300,000 sf to 200,000 sf) for its 215 attorneys.
- Blatt, Hasenmiller, Leibsker & Moore downsized from 30,000 sf to 23,000 sf with its recent move.
- McDermott Will & Emery and DLA Piper each will pare office space in their respective moves once River Point, currently under construction, is completed. McDermott Will & Emery will reduce its footprint from 303,000 sf to 225,000 sf, while DLA Piper will trim its space from 260,000 sf (part of which it currently sublets) to 175,000 sf for its 210 Chicago-based lawyers. (The building’s slightly narrower windows will allow more offices per floor than is the case with most existing skyscrapers.)
- Latham & Watkins modestly reduced its space from 144,000 sf to 136,000 sf when it moved with its 143 lawyers (and 245 employees) to the AMA tower. Dentons took Latham’s old space at the Willis Tower, moving within the building, but downsizing from 177,000 sf.
Firms are also shrinking their footprint by quietly subletting partial floors, particularly with spaces earmarked for future growth that has not materialized. In Manhattan, Weil, Gotshal & Manges, which underwent a downsizing of 60 junior attorneys and 110 staff last year, sublet a small portion of its space on the 23rd floor of the GM Building (767 Fifth Avenue) in April, while Davis Polk & Wardell sublet 27,000 sf in its 450 Lexington Avenue office and Sills Cummis & Gross and Sullivan & Worcester each recently signed subleases from other law firms (for 25,000 sf and 12,500 sf, respectively.)
In Chicago, too, many firms have sublet space, although in many cases, the need to sublet arose from attorney reductions. According to Chicago Lawyer Magazine, Jenner & Block sublet two of its 14 floors after its attorney count fell from a peak of 386 in 2006 to 279 in 2014, while Mayer Brown gave back one floor and sublet another in 2013 as its Chicago attorney count fell from 509 in 2009 to 375 in 2014. Locke Lord sublet approximately 55,000 sf last year as well. Skadden, Arps, Slate, Meagher & Flom and Kirkland & Ellis—each of which has seen their Chicago headcount decline over the past five years—each have sublet space, while Winston & Strawn, whose attorney count has fallen by -17% over the past two years, currently has 75,000 sf of sublet space on offer.
Many other firms currently have sublease space on the market even if they have not experienced a dramatic reduction in attorney count over the last few years—again, consistent with the trend to “universal” offices—similarly-sized offices for partner and associate alike (Table 8).
Table 8: Attorney Count by Year and Sublet Space Available, Select Manhattan Firms
Source: Savills Studley and National Law Journal
Aggregate law office space also has contracted as firms have trimmed their support staff, evident in the lackluster growth of legal secretaries (Chart 4). With clients more vocally scrutinizing legal bills, law firms have begun to increase their use of electronic document review, records management and discovery services, which has reduced their need for paralegals as well. As with temporary hires—which enable companies to “optically” reduce their headcount and associated benefit expenses—the use of third-party vendors (such as Williams Lea and Accenture) has proliferated as firms remain focused on cost cutting.
Not surprisingly, an article from the American Bar Association had this to say in an article published earlier this year.6
"Some law firms, wanting to cut costs and increase efficiency, are eliminating legal support staff positions, including secretaries. Those remaining secretaries, who once supported one or two attorneys, are now often supporting five or more, especially when assigned to younger lawyers. In addition, some law firms have retitled “legal secretaries” as “legal assistants,” not only so they can bill certain tasks of the secretary (such as drafting correspondence or organizing documents) to clients, but also to entice a new generation of entrylevel college-degree workers who view a secretarial job as temporary or transitional."
Earlier this year, Arnold & Porter offered voluntary resignation packages to its entire secretarial staff, for example, and over the summer, Sheppard, Mullin, Richter & Hampton offered voluntary retirement to certain older employees in offices in California, “with the possibility of further cutbacks among the administrative staff in the future.” Other staff cutbacks are noted in Table 9.
Chart 4: Legal Secretary Employment
Table 9: Select Support Staff Reduction Announcements, 2014
Source: Online articles
In addition to the lackluster growth of attorneys and legal staff employed at law firms overall, law firms have been shifting a number of the non fee-earning workers that they have retained to lower-priced locales. While some firms have trimmed expenses by outsourcing some administrative functions to third-party providers, others have taken advantage of lower labor costs and less costly office space by shifting operations away from major metropolitan areas. Tampa is home to back-office operations for DLA Piper, for example, while White & Case recently announced its own service center there, having received approximately $300,000 in incentive grants to relocate 45 positions. In June, Fish & Richardson announced a plan to save $3 million per year by consolidating its administrative functions in Minneapolis—a move that followed Sedgwick's decision to operate certain administrative positions in Kansas City, Missouri. Kaye Scholer relocated 100 staffers to Tallahassee, while Pillsbury Winthrop Shaw Pittman's back office is in Nashville.
For law firms, the shift toward reduced space allocation is likely permanent. While we don’t foresee law offices being configured in the “workbenching” model that has become so popular with technology firms any time soon, we would expect further compression of space on a per attorney basis. The lack of growth in the number of practicing attorneys is puzzling, too. Such anemic headcount growth so far into a recovery suggests that the contraction observed to date is more than just a cyclical phenomenon, and that we are unlikely to see a rebound in the amount of space occupied overall stemming from an increase in the number of attorneys (even if each attorney is given a smaller desk.) Looking ahead, we suspect that firms will continue to shed unneeded space through further sublet activity— particularly to other law firms looking to expand their footprint geographically. Firms nearing lease expiry will continue to look for more open floor plans achieved either through re-design or new construction, with the result that more open space for everyone means smaller office space for each one.
1 Norm G. Miller, PhD. “Estimating Office Space per Worker: Implications for Future Office Space Demand.” Forthcoming: Journal of Corporate Real Estate.
2 Conducted by The American Lawyer.
3 The ratio of total occupied square feet per attorney is not meant to represent the amount of space allocated per attorney, as it ignores all non-attorney professionals. Rather, it is meant to serve as a rough proxy for attorney space allocation.
4 In some cases, loss factors have increased between lease signings, which can have the effect of making firms appears as if they have taken more space than if the loss factors have been maintained at prior levels.
5 Their lease was arranged in 2012.
6 Cynthia Thomas, “The Changing Role of Legal Support Staff. Law Practice, Volume 40, Number 1.