Law Firms Leave Westside as They Cut Back : Real estate: Operations are being consolidated in Downtown high-rises, where rents are a bargain.
Unlike blue jeans, office space is not designed to shrink to fit--a fact painfully clear to many Southern California law firms, which make up a significant chunk of the area’s top-dollar tenants.
For a number of firms, having too much office space is only the beginning of the problem. The rest is that today, sub-lease rates for their excess space in Downtown Los Angeles office buildings are at rock-bottom, compared to peak-market prices they are paying on leases dating back to the 1980s.
And the costs of excess real estate becomes magnified as firms, despite some upturn recently in business, strive to operate in a new environment of much-lower margins and fee-savvy clients.
“With the way things are going, law firms just can’t operate as loosely as they once did,” said one law firm consultant. “They’ve got to be more careful, and if they can save money here and there, they’ve got to do it.”
Gibson, Dunn & Crutcher, which dropped in size from about 700 to 620 attorneys over the course of the recession, said last week that it is considering closing down its Century City office next year. The 75 attorneys and their support staffs now in the Century Plaza Towers would be moved Downtown, where the state’s biggest law firm occupies 10 floors in the Wells Fargo Center.
Another firm, Sidley & Austin, recently closed its Century City office, consolidating its staffs Downtown; Cleveland-based Jones, Day, Reavis & Pogue also closed its Westside offices this year.
Law firms that were experiencing unlimited growth during the boom years of the mid- to late-1980s--and expected it to continue indefinitely--locked themselves into leases with what today are very high rates. The deals also called for the firms to take on even more space over the terms of the leases.
Since then, many of these firms have slimmed down and--like dieters stuck with big-waisted trousers--faced difficult alterations.
While Gibson, Dunn’s lease on its Century City office space does not expire for another eight years, the outlook for subletting that space is better than for its excess space Downtown. In Century City, where the best offices command a premium, vacancy rates are at 15%, according to the CB Commercial real estate firm. Downtown, vacancy rates are pegged at 24%, twice what experts consider as optimal.
“They probably could sublease their space on the Westside at higher rates than Downtown,” said Cathy Schloessman, senior vice president for CB Commercial’s western division. “Another important consideration is that it’s cheaper to have one office than two, because of efficiencies of scale.”
Prices for office space Downtown have dropped as low as $9 per square foot, with an average of $13 to $16, Schloessman said. Some of the law firms are paying as much as $30 to $35 for each of the tens of thousands of square feet they occupy Downtown.
While other major firms that have offices both Downtown and on the Westside--including Loeb & Loeb and Paul, Hastings, Janofsky & Walker--in the past have discussed consolidating Downtown, none say they now are considering it. For firms that have significant entertainment law practices, a Westside office is pretty much a necessity, they say.
Yet “every firm is looking at its operating expenses with a magnifying glass,” said Steven Bay, a senior vice president with the commercial real estate firm Julien J. Studley Inc. Office costs account for 7% to 10% of the average firm’s budget, and those with too much space are working to fill it--most often through subletting to other businesses.
Also, many firms have renegotiated their leases--or tried to--in the past couple of years to get lower rates, said Schloessman. And while more firms would like to do so, landlords are reluctant to give up the high lease rates.
