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Law firms beat a retreat.

Byline: Peter Kiefer

When it comes to bucking the trends of an economic downturn, lawyers have historically shown an uncanny knack for self-preservation. Now, with bankruptcies on the rise and litigation expected to spike, it would seem that the legal services industry is again well positioned to survive, or even benefit, from the downturn.

But mercy is in short supply these days, and no law firm -- not even some of the country's most august -- seems to be escaping unscathed.

Over the past few months, the 118-year-old firm Heller Ehrman and the 84-year-old firm Thelen Reid dissolved. Both were based in San Francisco, but had substantial presences in Manhattan, with offices at 7 Times Square and at 875 Third Avenue, respectively.

For other law firms, the list of unsettling signs appears to be growing.

There are increasing reports of firms canceling Christmas parties, freezing bonuses and withdrawing employment offers to summer associates. The legal industry had previously enjoyed six years of substantial growth in New York City, but now leasing activity is a third of what it was last year.

One recent report predicts that average law firm profits per partner could decrease by as much as 15 percent in 2008, with no significant turnaround until the end of 2009 at the earliest.

The industry slowdown bodes ill for New York's commercial real estate market. According to Newmark Knight Frank, law firms occupy 24.8 million square feet in Midtown out of nearly 250 million square feet there and another 6.9 million square feet Downtown. Law firms are second only to the finance industry in the amount of leased commercial space they occupy; a retrenching could result in the shedding of hundreds of thousands of square feet of Class A commercial space.

"I think that [law firms] were all bullish over the last few years -- and, it being a landlord-favorable market, they had to take space for their anticipated growth. So firms are now sitting with too much space," said Lisa Keill, managing director at Jones Lang LaSalle.

Already this year, leasing activity by law firms has plunged. In 2007, law firms accounted for 17.4 percent of the leasing activity in the city market. This year, the legal industry has accounted for just 6 percent of that activity.

In the last month alone, Orrick, Herrington & Sutcliffe, which had been looking for up to 200,000 square feet of office space, scuttled plans to move to the Citigroup Center at East 53rd Street and Lexington Avenue, according to sources with knowledge of the deal. Meanwhile, a deal that would have brought the prestigious firm Proskauer Rose to 250 West 55th Street also fell apart. And, in what may prove to be a growing trend, Weil, Gotshal & Manges, as part of an expansion, has opted to relocate staff members into 35,000 square feet of new space at 15 MetroTech Center in Downtown Brooklyn. A spokesman said the firm had no intention of vacating its space in the General Motors Building. That lease doesn't expire until 2019.

"A lot of people are pulling back," said Barry Gosin, CEO of Newmark Real Estate. "People are rethinking and being more careful."

Law firms have characteristically sought more individual office space for their partners and associates than other types of businesses, resulting in a ratio of leased-space-to-employees that is one of the highest in the city, according to a number of brokers.

Even now, while leasing deals have slowed to a trickle, a number of brokers say there are few signs of desperation.

In fact, there has been a smattering of smaller deals inked by law firms over the past three months. The Spanish law firm Garrigues signed a 10-year lease for 9,500 square feet at 780 Third Avenue; Moskowitz & Book signed a lease for 6,500 square feet at 345 Seventh Avenue; Jenner & Block signed for 13,288 square feet at 919 Third Avenue; O'Shea Partners signed a lease for 6,600 square feet at 521 Fifth Avenue; Belluck & Fox signed a lease for 11,700 at 546 Fifth Avenue and Hiscock & Barclay signed for 12,500 square feet at 7 Times Square, where Pryor Cashman also just signed a 15-year lease for 100,000 square feet.

In addition to that, spirits were leavened last month when the firm Fitzpatrick Cella Harper & Scinto signed a 15-year lease for four and a half floors, or 126,000 square feet, at 1290 Sixth Avenue.

Still, with leasing activity down, some are predicting things will get worse before they get better.

James Jones, chairman of the international consulting firm Hildebrandt Institute, is playing the role of the reluctant spoiler. A recent report he authored predicts that the worst is yet to come for the legal services industry.

And, last month McKee Nelson, a New York firm, announced that it had laid off 17 corporate and finance associates, reducing its total number of lawyers to 174. Orrick, Herrington & Sutcliffe announced last month that it, too, is laying off about 40 associates and counsel in the firm's real estate, structured finance and corporate practices.

"I think that we will continue to see dissolutions, and I don't know if we will see any significant uptick in 2008," Jones told The Real Deal. "You don't have the kinds of lavish, reckless decisions that you can point to, like in investment banking, or insurance. You don't see the executive bonuses. But I think it is true that some firms have expanded without really thinking strategically about it, and that has hurt some firms, and has led to some serious problems."

Peter Turchin, executive vice president at CB Richard Ellis, had a more positive view. He said a number of firms have expressed interest in leasing the space vacated by Heller Ehrman at 7 Times Square, though no lease has yet been finalized.

Turchin also noted that the firm Gibson Dunn signed a lease at 250 West 55th Street, which is under development by Boston Properties. The 38-story tower will offer 1 million square feet of office space and 25,000 square feet of retail.

"There is some shrinkage, but there is some growth," Turchin said. "I don't think you are going to see firms change to an open landscape anytime soon. I do think that law firms are looking at dollars per attorney and not dollars per square foot.

"And it is a question of, 'How efficient can my space be?' And they are very, very focused on that issue."

Other brokers tempered their concerns, citing the countercyclical nature of certain law practices. They are expecting fierce competition among those firms with more specialties that do well in a down market: bankruptcy, litigation and regulatory work.

"I am concerned about every aspect of the city's business, but not overly concerned about the legal business," Gosin said. "In turmoil, lawyers are needed. We are in a holding pattern as to what everything is going to look like but there is going to be lots of litigation, lots to work out, lots of blame. So, I have faith in the legal industry."
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Author:Kiefer, Peter
Publication:The Real Deal
Geographic Code:1USA
Date:Dec 1, 2008
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