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Law Firms Are Dumping Office Space. What it Means for Investors

Jan 23, 2021 by Maurie Backman
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It's not exactly news at this point that office buildings are struggling as a result of the coronavirus pandemic. Many commercial tenants had no choice but to move their staff to remote work at the start of the outbreak, and now, 10 months later, many are making plans to keep their employees remote on a longer-term basis. As such, leases aren't getting renewed, and tenants have the clear upper hand in negotiating their terms.

All of this clearly paints an ugly short-term picture for office buildings, but one disturbing trend may point to the potential for longer-term pain. Law firms have, in the course of the pandemic, been dumping office space. And if that continues, investors and commercial landlords may really be in trouble.

Losing law firms is a blow

In 2019, law firms accounted for 5.9% of all U.S. office leases, according to CBRE. And in strong markets like Manhattan, they ranked fifth from the top for the largest office leases signed that year.

But law firms haven't exactly been rushing to re-sign leases. Quite the contrary -- new leases in the legal sector have largely been put on hold, reports Cushman & Wakefield (NYSE: CWK), and firms that are renewing are limiting themselves to short-term agreements. Meanwhile, those who are entering into longer-term leases are downsizing their office space by anywhere from 10% to 40%.

That's not all. Law firms are expected to permanently lay off 15% to 30% of their attorneys and support staff due to the financial impact of the pandemic, according to a recent Cushman & Wakefield survey. And law firms also plan to increasingly identify staff members who can work from home permanently or come into the office on a partial basis. That could, in turn, deal a devastating blow to office buildings and REITs that derive the bulk of their revenue from them.

Take SL Green Realty Corp (NYSE: SLG), Manhattan's largest office landlord. While its share price has gained in recent months, a year ago, it sat at roughly $93 and now sits at $63. Since Manhattan has long been a legal hub, losing law firms could deal a tremendous blow to a city that's already been hit hard.

Law firms have traditionally required large amounts of office space to meet with clients, host meetings, and function in an industry that's very much rooted in face time. For these tenants to start downsizing drastically is, in a word, huge.

Of course, some law firms may seek to sign larger spaces once the pandemic is clearly a thing of the past and it's unquestionably safe to bring full-time staff back under the same roof. (If there's any industry that's going to be sensitive to liability in the age of coronavirus, it's the legal industry.) But others may seek to piggyback on the forced adoption of remote work and reap what could be substantial savings in the process.

Some industry experts already fear that office buildings won't recover until late 2022. But if law firms continue to unload space, there could be a question as to whether they'll manage to recover at all.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.