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The cavernous lobby of Wilmer Cutler Pickering Hale and Dorr’s downtown D.C. office looks like an ancient Greek temple, albeit with 21st century touches. Mammoth slabs of white marble and granite soar upward to a glass ceiling eight floors above, while to the left of the reception desk, visitors hear the soothing cascade of an indoor waterfall. Of course, all that opulence comes with a steep price. Four years ago, Wilmer consolidated offices in three D.C. buildings into one at 1875 Pennsylvania Ave. N.W., a move that gave the firm a trophy space and room to grow — two of the most important factors law firms consider when they put down roots. Now, with more than 560,000 square feet for its 450 Washington-based lawyers, Wilmer is spending close to $30 million a year on rent, the largest annual total among D.C. firms. “We’re very happy,” says assistant managing partner Carol Clayton, who led Wilmer’s office search. “When you look at where the market has gone, we are paying a good price. That’s important. Nobody wants to be economically disadvantaged.” She has a point. Despite the recent crunch in the real estate markets, the cost of prime commercial space in the District is going up, up, and away. Firms are looking at prices that until recently would have been more common in midtown Manhattan. In Washington’s central business district, newly built space is being rented for roughly $70 per square foot, according to numbers supplied by the commercial real estate firm Studley. In less than two years, brokers estimate, the average cost per square foot has increased by about 15 percent. In a sign of the times, developer Louis Dreyfus Real Estate plans to deliver a 240,000-square-foot building at 801 17th St. N.W. in early 2009 and says it expects rents for the upper floors to break the $100 barrier, something never seen before in the District. Firms that want to maintain prestige space in the heart of the D.C. business district have to pay what the market demands. Earlier this year, Mayer Brown committed roughly $250 million to a 15-year lease in what promises to be one of the city’s showpiece buildings. The search took 15 months and spanned the business district, from a site near the Washington Nationals’ new ballpark in Southwest to Rosslyn, Va. Mayer eventually decided to take all 242,000 square feet of the Helmut Jahn-designed building set to open in September 2009 at 1999 K St. N.W. Peter Scher, the office’s managing partner, says the space could eventually accommodate more than 350 lawyers.
IT’S THE LEASE WE CAN DO
A short guide to the rental arrangements of some major law firms in the D.C. area (Chart)

A few blocks east and south of Mayer’s future home, Bryan Cave, a Midwest firm, signed a new lease for about $6 million per year at 1155 F St. N.W. Cadwalader, Wickersham & Taft, with about 65 lawyers, has grabbed 93,000 square feet of new office space at 700 6th St. N.W., which brokers say upped the firm’s annual nut in the District by more than $1 million. And Cleary Gottlieb Steen & Hamilton renewed and expanded its lease at its 2000 Pennsylvania Ave. N.W. office a few months ago, taking on 143,000 square feet (an expansion of more than 30,000 square feet). With about 100 lawyers in the District, Cleary will be spending about $6.7 million annually on rent. �AN EXCELLENT DEAL’ These prices herald the upswing in the commercial real estate market. For example, brokers estimate that, at nearly $70 per square foot, Mayer Brown’s new digs will cost the firm more than $4 million a year above its current rent. “We wanted a first-class office, and we wanted to consolidate,” says Mayer’s Scher. “In our view, the D.C. market is not slowing down. Costs are only continuing to increase.” It was only three years ago that Dickstein Shapiro signed a 15-year lease for more than 400,000 square feet at 1825 I St. N.W. Dickstein’s rent is now around $42 per square foot — roughly $25 less per foot than Mayer will pay in its new home. And while Mayer may be getting newer digs, Dickstein’s lower rent is a tangible financial advantage. “We took a space and gutted and totally remodeled it,” says Michael Nannes, chairman of Dickstein, which used existing capital to pay for the office remodeling and has no debt from the move. “We have a lease — when we see what others are paying in town — of which we are very proud: an excellent deal locked up for 13 more years.” The rising cost is not good news for law firms already getting squeezed by associate pay raises earlier this year. Rent is typically a law firm’s second-highest expenditure, after associate salaries, and it could prove even more burdensome should a slowdown occur in 2008. One other result of the rising prices is a sense of urgency in the early stages of the hunt for space. Arent Fox and McDermott Will & Emery both have several years remaining on their existing leases, but they are nevertheless on the lookout for new space. “We have about 250 lawyers, and before our lease is up we’ll have 300,” says Marc Fleischaker, chairman of Arent Fox, which has five years left on its lease. “We can’t fit that many lawyers in our current space.” What’s driving the cost is limited supply. Because of the District’s building height restrictions — a building generally can’t be more than 20 feet taller than the width of the street in front of it — Washington has a finite amount of downtown space that in recent years has been almost gobbled up. According to real estate firm Studley, only 5 percent of office space in D.C.’s central business district is unoccupied, a percentage brokers say is low compared to most cities. To escape the escalating costs, some firms have considered moving to another part of town, much as Covington & Burling did in 1981 when it relocated east of 16th Street Northwest, then an area considered downmarket. Now the move looks like a stroke of genius, as the real estate around Covington’s office at 1201 Pennsylvania Ave. N.W. is some of the most expensive in Washington. But urban pioneering is not to the liking of most firms, and ideas like moving to Virginia or Southeast are often discussed but rarely acted on. “Pioneering in terms of being the first to move to a new area of town can have its benefits on the bottom line,” says Jay Epstien, chair of DLA Piper’s U.S. real estate practice. “But I don’t see any major D.C. firms moving away from the broad expanse of downtown locations in the near term.” �A BAND-AID ON A BULLET HOLE’ Nobody wants to get it wrong — especially when the economy dips, as many in the industry are forecasting now. Just take a look at Brobeck, Phleger & Harrison, which slid from its place as a leading tech firm of the late 1990s into bankruptcy in 2003. A prime culprit in the firm’s demise was real estate. During its rapid expansion, the firm took on loads of prime space at top dollar. After the technology market crashed in 2001, those lease obligations became an albatross around the firm’s neck. After the firm folded, its ex-partners found themselves being sued by the firm’s former landlord. In Washington, a much more modest real estate dilemma confronted Morrison & Foerster a couple of years ago. As one of three primary tenants at 2000 Pennsylvania Ave. N.W. — along with Cleary Gottlieb and David Bradley’s research and consulting firm, the Corporate Executive Board — Morrison didn’t have the room it needed to accommodate its growing head count. So the firm looked elsewhere, settling on space at 1700 K St. N.W. In the second quarter of 2004, Morrison committed more than $60 million to the new space, signing a 15-year lease for about 77,000 square feet. But when it came time to start making rent payments in November 2005, Morrison attorneys hadn’t moved in. After signing for the new space, Morrison learned that the Corporate Executive Board was moving out of 2000 Pennsylvania, giving the firm the chance to stay and take on more space. Sources with knowledge of the deal say securities partner Robert Kurucza, along with partner L. Richard Fischer, talked the partnership into remaining in the building while trying to sublease its new space at 1700 K St. Kurucza led the search for a tenant, but subleasing didn’t prove all that easy. People with knowledge of the deal say that after courting several firms, including Buchanan Ingersoll & Rooney and Weil, Gotshal & Manges, to take on the entire space, Morrison was forced to sublease one floor each to Wilson Sonsini Goodrich & Rosati and Monument Realty. Lease numbers show that Wilson Sonsini is paying $10 less per square foot for the sublease space than Morrison signed for. In the long run that may prove to be a wash, since Morrison also re-signed its previous lease for $10 less than what it agreed to pay at 1700 K. But the space at 1700 K remained empty for more than a year, brokers say, leaving Morrison partners to pick up $4.5 million in dead-space costs. Still, the firm says it did not lose money. “Even with the delay, we did not take a hit because of the relative difference in cost between the two spaces,” Fischer says. Except, warns one broker, a sublease like that is “a Band-Aid on a bullet hole.”


Nathan Carlile can be contacted at [email protected].

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