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One Market Plaza is considered some of the best real estate in town, with views of the Bay Bridge on one side, Alcatraz Island on the other, Marin County and the East Bay beyond. But like a hot potato, the property has been passed from one owner to the next multiple times this year. The result is sizzling rents for the law firms calling the Steuart and Spear towers home. Some, like 14-lawyer Barg Coffin Lewis & Trapp, are being driven out: The environmental litigation boutique will be moving in November. Others, like 370-attorney Sedgwick, Detert, Moran & Arnold, are mulling less drastic ways to control real estate costs. That firm is looking for another building to relocate its firmwide administrative staff, according to a real estate professional familiar with the requirements. Sedgwick did not respond to requests for comment. In late 2003, Barg Coffin negotiated a $45-per-square-foot deal on its 16,200-square-foot space that would expire in 2008. But with insurance and property tax expenses that have since been passed on from landlords, the firm’s costs have already risen to $49. Partner Stephen Lewis said the roughly $794,000 the firm pays annually for real estate accounts for 14 percent of Barg Coffin’s total operating budget, and 11 percent of total income. On top of that, Blackstone Group’s acquisition of Equity Office Properties in early February is expected to add roughly $11 more per square foot per year, due to increased taxes and insurance payments that are passed through to tenants, according to the law firm’s real estate broker. That would translate into $15,000 more per month, or $178,000 per year, for Barg Coffin’s 27th floor offices. “To stay here, we would have to substantially increase our rates,” which top out in the mid-$500s, Lewis said � or take a hit to partner profits. That stark reality made the decision to move to the Union Bank building at 350 California St. a no-brainer, despite the relocation. “It doesn’t have the views that this has,” Lewis said, “but there was no choice.” NOT THE ONLY FIRM The smallest firms aren’t alone in feeling the sting. Tucker Ellis & West, a 135-lawyer firm based in Cleveland, occupies space on the 13th floor of Steuart Tower. Managing Partner Kim West said that its 11 trial lawyers will be moving in November to 135 Main St., where they will occupy 12,000 square feet. West said he watched the ripple effect of price increases in the One Market neighborhood after Blackstone’s quick sale of the complex to Morgan Stanley in late February. “Rents went up in other buildings we were looking at,” West said. “It caused us to rule out a couple of options that we may have considered.” Kevin Brennan, co-managing partner in the San Francisco office of commercial real estate company Studley, said he expects more firms to vacate the towers over the next year or two.
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“The very big firms, particularly the Am Law 50, are able to incur more costs if they choose because of their margins,” he said, though he adds that it “doesn’t mean they will.” He said many of his Am Law 200 clients are reanalyzing growth plans, and rising real estate costs will figure in their decisions about where to expand. Some are considering growing in markets outside San Francisco. Some law firms have shown a willingness to trade killer views for substantial savings. When Cooley Godward Kronish moved from the top of One Maritime to the bottom of 101 California St., the firm saved a little more than 30 percent per lawyer a year in occupancy costs, Brennan said. Sidley Austin moved from the top of 555 California St. to the 20th floor of the same building, taking over Shearman & Sterling’s space. That firm relocated to smaller space at 525 Market St., Brennan said. Prudential CRES Vice President Craig Childress (who is helping Barg Coffin with its move) says that in general, tenants’ costs go up about 3 percent per year. In Barg Coffin’s case, the extra $11 per square foot represents nearly a 25 percent annual increase. Childress said that for Sedgwick, which leases more than 130,000 square feet on several floors in Steuart Tower, the extra could add up to more than $1 million. “How many people bank on that level of increase?” Childress asked. “In all the professional services firms in the building � it’s going to be a real hit.” Artists Capital Management, the tenant taking over Barg Coffin’s space in the tower, will be paying roughly $100 per square foot, Childress said. Spencer Hosie, who runs a one-man complex commercial litigation firm out of the 22nd floor of Spear Tower, says luck played a role in his lease negotiations several years ago. The lawyer renegotiated his lease during the “bottom of the trough” of 2002 and now pays about $40 per square foot. Hosie expects a bill any day now with a hike of about $8 per square foot, which he said is manageable. “Happily, we are below market at our base rent, so we will stay,” Hosie said. He’s hoping that luck won’t run out in 2009, when his lease expires. “The commercial real estate bubble is going to break and we’ll negotiate our next lease at the bottom of the next trough,” he said.

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