Revenues Down, Law Firms Seek to Cut Leasing Costs
By AMANDA BRONSTAD
The view from L.A.’s skyscrapers is making some local lawyers queasy.
Faced with declining revenues and saddled with some of the most expensive real estate in town, a number of prominent L.A. law firms have approached landlords seeking to renegotiate terms of their leases.
Most of these firms are not yet in critical financial straits, strengthening the resolve of landlords who have resisted lowering rates.
“These law firms won’t admit they’re struggling,” said Whitley Collins, a senior vice president at CB Richard Ellis Inc. who represents tenants in lease negotiations. “Most don’t want to hit the panic button yet. But they have a bubble about to burst. If they don’t get better they will have to take dramatic action next year.”
Law firms usually spend a greater percentage of revenues on real estate, as much as 10 percent in a strong economy. For other businesses, as little as 5 percent of revenues is allocated to leases.
But in the past 18 months, the percentage of revenues law firms are spending on leases has reached 15 percent to 20 percent, Collins said.
“The longer a poor economy goes on, the more pressure there’s going to be on law firms to lower costs. And the more desperate law firms will be to try to do something with their landlord,” said Clay Hammerstein, executive managing director for Insignia/ESG.
Many landlords of high-end space aren’t yet willing to negotiate, betting that firms won’t move out or that they can replace them quickly with tenants willing to pay above-market rates.
“Even though rental rates have come down over the last 18 months, I don’t believe landlords feel the pressure to reduce rates,” said Dennis Ellman, chairman of the real estate department of Greenberg Glusker Fields Claman Machtinger & Kinsella LLP.
Landlords generally believe that most law firms aren’t about to go out of business, noting the exception of Lyon & Lyon LLP, an intellectual property boutique that dissolved on Aug. 7 and had its offices at Library Tower downtown.
“There are not 20 different Lyon & Lyon situations out there,” Hammerstein said. “Still, that’s not to say that in another year, there won’t be.”
Many larger firms are coming to the end of 15- to 20-year leases, having moved into their offices during the boom years of the late 1980s.
Charlston Revich & Chamberlin LLP is negotiating with its landlord, California State Teachers Retirement System, on a lease that expires in March 2003 at 1840 Century Park East, said Stan Gerlach, senior vice president at CB Richard Ellis, who represents CalSTRS. The firm is seeking to reduce its 16,678-square-foot lease to as little as 12,000 square feet.
Gerlach also represents Kirkpatrick & Lockhart LLP, which has been trying to sublease a portion of its Century City space at 10100 Santa Monica Blvd. for the past six months.
White & Case LLP, a New York-based firm that has four floors in Library Tower, approached landlord MaguirePartners earlier this year about extending its lease and lowering rates to about $1.80 or $1.90 per square foot per month from an estimated $3.33 per foot per month.
MaguirePartners balked at the idea, and White & Case Managing Partner Richard Smith said the firm would begin looking to relocate as early next year, even though its 15-year lease in Library Tower doesn’t run out until 2005.
“Our lease expenditures are our second largest expense,” Smith said. “For us, it’s way out of proportion because our rents are so high. Our rent expenses are significantly higher as a proportion of overhead operating expenses than the same percentage firm wide.”
Smith declined to be specific about either the lease rate or the percentage of revenues it represented.
Robert Maguire, managing partner of MaguirePartners, declined to comment on White & Case’s lease negotiations, but noted that “generally speaking, we really are not having discussions with any of our significant law firms about re-negotiating leases.”
But Smith and other real estate sources said White & Case’s predicament is not uncommon.
Real estate and legal sources said Milbank Tweed Hadley & McCloy LLP recently failed to renegotiate the terms of its downtown office space at 601 S. Figueroa St.
Milbank partners referred calls to John Cushman, chairman of Cushman & Wakefield Inc., who could not be reached for comment.
Jeffer Mangels Butler & Marmaro LLP moved this month from Fox Plaza to 1900 Century Park East, where it could save $2 million a year in rents, sources said.
And Blake Mirkin, vice president at CB Richard Ellis, said Christensen Miller Fink Jacobs Glaser Weil & Shapiro LLP’s lease at Constellation Place, signed a few weeks ago, would result in substantial savings over the $5 to $6 per square foot per month it paid at Fox Plaza.
“Christensen Miller was able to negotiate a deal that was so substantial in reducing rent versus staying at their existing location that it made sense to terminate their lease, pay the fee and relocate,” said Mirkin, who represented Christensen Miller.