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While riding the Tiburon ferry one recent morning, Ira Rosenberg met a fellow lawyer and happened to mention he was looking for office space. The other lawyer was only too happy to oblige — immediately offering to rent Rosenberg a spare floor at his downtown San Francisco firm. The lawyer even followed up right away with an e-mail to Rosenberg that read an awful lot like a real estate broker’s listing. “I thought it was bizarre,” said Rosenberg, a partner at Newark, N.J.-based Sills Cummis Radin Tischman Epstein & Gross. “You don’t expect a person who’s so successful to have available an extra floor.” Excess real estate is a problem plaguing a whole host of Bay Area law firms. Firms that bet the farm on the technology boom are suffering, and so are some with more traditional practices. The problem is simply that many are saddled with expensive leases and took on too much space when times were good. Now they’re having a hard time paying their rent, and they aren’t finding anyone to sublease the excess. “We have a long and proud history of California law firms failing because of bad real estate deals,” said Michael Lubic, a bankruptcy partner at Sonnenschein Nath & Rosenthal. “They’re always getting into markets right when they’re peaking and exiting markets when they’re down.” In case Lubic’s point is a little fuzzy, consider the soon-to-be-defunct Brobeck, Phleger & Harrison. During the dot-com bubble, firm managers apparently thought Brobeck’s growth would be perpetual, and added space accordingly. In East Palo Alto, the firm leased a six-story building that could hold 600 staff and attorneys and optioned two floors in another building. The firm paid $60 per square foot for the space and made additional expenditures to improve the buildings. Including the leased and optioned space, Brobeck’s total space in East Palo Alto topped 180,000 square feet, and the firm had a multi-million dollar annual rent bill. But Brobeck never came close to filling more than two floors in East Palo Alto. And in the past two years, as partners quit, there weren’t enough lawyers left to pay the overhead. The excess space helped mortally wound the firm. That scenario is one that Brobeck’s Bay Area competitors would like to avoid for themselves. But getting out of the hole is going to be tough. The commercial vacancy rate was 22 percent in San Francisco in the fourth quarter of last year, according to real estate firm Cushman & Wakefield. In Silicon Valley, it was 27 percent. Commercial real estate rates that hit $100 or more per square foot have plunged to $28 to $40 in San Francisco. That isn’t good news for firms like Shearman & Sterling, which inked a lease for 29,000 square feet in San Francisco at the height of the boom. But the firm hasn’t hired nearly enough lawyers locally to fill their offices at 555 California St. The firm has put the office on the market, but so far has had no takers. Though the decision to list the office fueled speculation that Shearman was leaving town, John Wilson, who manages Shearman’s West Coast offices, said the firm isn’t closing. “If they offer us the right deal and take this space, we could move into a smaller space,” Wilson said. Also paying the price are firms that tried to make a quick buck during the boom. In 2000, San Francisco’s Severson & Werson took an additional floor at One Embarcadero Center, expecting to lease it out for top dollar, said Ron Manuel, the firm’s chief operating officer. That didn’t happen. Though the firm found a tenant, it wasn’t until after real estate prices began to plummet. The firm says it’s breaking even, but it’s certainly not the cash machine that it had hoped for. “There’s more space available than there are people willing to lease space at the moment,” Manuel said. Something similar happened to Fish & Richardson when it took new offices in Redwood City in 2000. The firm took three floors, expecting to use two of them. Fish lawyers had planned to sublease the third for a few years and then take it over when they needed the space. But again, the space glut scuttled those plans. Renters balked at the relatively short lease time of five years that Fish was offering. “It’s sort of an unfortunate fact,” said Hans Troesch, managing partner of the office. “Every once in a while I look back and ask if I would have done anything differently, and I don’t think so.” Of course, Fish’s single empty floor looks pretty good to firms like Gray Cary Ware & Freidenrich, which has thousands of square feet of space to unload. The firm has an empty, 19,000-square-foot building and pockets of excess space in other buildings in Palo Alto. The firm also has excess space in its Austin, Texas, office. John “Bob” Shuman Jr., Gray Cary’s managing partner of operations, tried to put a positive spin on the empty offices: “We kind of like having the capacity in case things change,” he said. Then again, “We would sublease it if we were to get the right offer.” Of course, Brobeck’s collapse may change the dynamics a bit. Firms picking up Brobeck lawyers may need additional space to house them. And some firms may use the meltdown as a negotiating tool with their property owners, warning that they may lose a paying tenant if their firm is forced to shutter because of high rents. “There’s a whole mix-up going on in the legal world,” said Dick Robinson, a senior director at Cushman & Wakefield. “It seems like the speed with which [firms] form, merge, break up and morph into something else is much greater than it used to be.” Some firms have already taken advantage of the space glut in their lease negotiations. Orrick, Herrington & Sutcliffe is contemplating leaving its digs at the Old Federal Reserve Bank at 400 Sansome St. in San Francisco. The firm has signed a letter of intent for space at Foundry Square in South of Market. Though the deal hasn’t been finalized, Orrick Chairman Ralph Baxter Jr. said the firm wouldn’t have shopped around “if the landlord had been able to make us offers that dealt with the issues we need to deal with.” Not every firm that grew its ranks during the boom bulked up on real estate. Morrison & Foerster learned its lesson in the early 1990s. At that time, it took on vast tracts of office space in Los Angeles. When recession hit, the firm was left carrying several million dollars worth of vacant real estate. MoFo didn’t repeat the mistake during the late-1990s. Though it topped 1,000 lawyers during the technology bubble, managers remained stingy with space. Summer associates, for example, had to share offices, said Keith Wetmore, MoFo chairman. “You take the political risk internally by not taking the space that everyone wants so that collectively you don’t expose the firm to financial risk,” Wetmore said. “I think our people understand that there are a lot worse things that can happen than having to double up for six months.” While many firms are looking to unload space, a few are actually in the market to grow. Gibson, Dunn & Crutcher just picked up 40,000 additional square feet in Silicon Valley, and another L.A. firm, Latham & Watkins, is on the prowl for bigger quarters. Awash in litigation, Latham is subleasing space near its Menlo Park office to house war rooms for several big cases. And the firm is also in the market for a larger building, said partner Peter Kerman, who manages the firm’s Silicon Valley office. “Our building will take us to 80 lawyers, and we have about 65 lawyers currently,” Kerman said. “When you add a summer class into that mix, you’re quickly out of room.” Kerman can afford to be choosy in his hunt for some 150,000 square feet. He’s looked at Fenwick & West’s old space in Palo Alto Square, but decided he didn’t like the layout. And Brobeck’s space in Palo Alto was too pricey, he said. “There’s a lot to look at,” Kerman said.

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