Slow job growth coupled with high vacancy rates have created a renter’s market for small and midsize Washington law firms. Yet larger law offices that will soon be looking for new digs will have fewer options.
In the next few years, leases are set to expire for a number of big D.C. law offices, including Sidley Austin; Venable; Morgan, Lewis & Bockius; Patton Boggs; Latham & Watkins; Finnegan, Henderson, Farabow, Garrett & Dunner; and Steptoe & Johnson LLP. Several are expected to be actively looking to move to a new location.
According to an internal report released in August by Studley, a real estate company that has handled many law firm moves, the tenant-friendly market — for some firms, at least — is likely to continue over the next few years.
“It all depends on how large of a tenant you are,” said Jay Epstien, the Washington-based chair of DLA Piper’s U.S. real estate practice group. “It’s always been true in this town that larger tenants have fewer selections. If you’re a major tenant in the market, the choices are narrow unless of course you broaden your geographic horizons.”
Larger law offices typically have a tougher time finding space because only certain locations are large enough to accommodate them. “There aren’t many options to begin with for large firms,” said Thomas Fulcher Jr., Studley executive vice president and co-regional manager. “If you are a 10,000-square-foot tenant, you will find hundreds of options. 200,000 square feet, on the other hand, will be more difficult. Either you take space in one of the existing buildings with larger floor plates at lower rents and put more people on the interior or you look for something new and efficient. And those new and efficient buildings are only going to be built if they have commitments from large tenants. If you are looking for prime sites, there aren’t that many.” (Buildings with smaller floor plates can accommodate more offices with windows.)
The majority of the new construction is taking place away from the traditional law firm haunts in the K Street and Metro Center neighborhoods, instead heading east toward Chinatown and Capitol Hill. “I think Metro Center used to be the center of the world, but the center of gravity is moving,” Fulcher said.
In October, McDermott, Will & Emery moved into its new offices a block from Union Station near the Capitol, and Covington & Burling recently inked a 20-year deal as the anchor tenant in the CityCenterDC development, northwest of Chinatown. The vacated spaces, which firms have occupied for decades, leave behind now-antiquated floor plans and layout configurations.
Regardless of whether a firm takes over an existing space or contracts for new space, Fulcher and David Lipson, executive vice president and director of Studley’s Washington office, say law firms need to start their search early so they can be prepared to take advantage of the right opportunity when it comes along. “You either take advantage of an opportunity or the market turns against you,” Lipson said.
PRICE IS RIGHT
Law firms in D.C. can expect to pay between $55 and $65 a square foot for larger floor plate buildings, whereas new developments, like Arent Fox’s future building on the northwest corner of K Street and Connecticut Avenue N.W., can run as high as $75 per square foot. (Although Legal Times in 2008 reported $75 as the new office price per square foot, a spokesman now says the firm is paying $54.50 per square foot for their new office space.)
Arent Fox, set to move into 225,000 square feet of space early next year, started exploring possible real estate options about five years before its lease was set to expire. At the time the firm started its search, Mayer Brown was negotiating for the same space, but the deal fell through. Arent Fox swooped in and was able to negotiate a deal that put the firm’s name on the building.
“We realized, as any end-user who needs between 250,000 and 300,000 square feet in this city, that it is a long-term proposition because of the availability of blocks of space of that size,” said Mark Katz, Arent Fox’s D.C.-based chairman. He said that the firm didn’t prejudge whether it wanted to stay in its existing space or move to a new one. The firm considered how a new office would affect the commute of its attorneys and staff, and wanted the new address close to one or more Metro lines. Ultimately, the firm decided on a project next door to its current building. One of the benefits of being lead tenant is that the firm will have better expansion opportunities in the coming years, he said.
“It continues to be a tale of two markets,” Katz said. “200,000 square feet and up is still a tough market. I think it will always be a tight market. For the smaller end-users there is more availability.”
Attorneys who work out of smaller D.C. law offices concur. When Richard Morvillo left Schulte Roth & Zabel to start a boutique with his nephews in May, the firm sought out sublets and suites for its offices in D.C. and New York. “The D.C. market was more expensive, but there were many choices in the 3,000-square-foot range,” Morvillo said in an email. He said the firm was able to land an office which had been remodeled on 17th Street N.W.
In March, Thompson Hine relocated to a 35,000-square-foot office at 1919 M St. N.W. The partner-in-charge of the Washington office, David Wilson, said the firm started looking for new real estate three years before its lease expired. The firm’s D.C. office, home to 37 lawyers, according to its website, was looking for a space with better technological capabilities, more conference space and room to grow. The firm got a better deal, he said, by renting a space that was already built out. “It was exactly what we were looking for.”
In an interview published in the November 5 issue of The National Law Journal, Edward Newberry, the managing partner of Patton Boggs, said his firm is currently exploring real estate options ahead of its 2017 lease expiration. “We like it here,” he said of the firm’s West End headquarters. “I don’t know what we’ll do, but we’re certainly going to see what’s in the marketplace. There is not much available citywide that can accommodate a firm of our size.”
McDermott’s move to Capitol Hill shows that firms are willing to consider an expanded map. (Jones Day’s D.C. office is near McDermott’s.) As of now, though, Epstien said no firm has been brave enough to venture out to the neighborhood north of Mt. Vernon Square and the “NoMa” neighborhood north of Union Station. These areas remain a Wild West frontier for law firms — but eventually firms may run out of viable options. At some point, he said, “somebody is going to have to move.”
Matthew Huisman can be reached at firstname.lastname@example.org.