Law firms arguably are the most coveted type of tenant for high-end office landlords now as companies tied to Wall Street and the housing market have hit the skids.
And lucky for local landlords, many law firms are looking to Orange County as a place to get a good deal on a long-term lease, according to tenant brokers.
For a large law firm searching for a new office or looking to renew an existing lease, “the world is yours,” said Randall Parker, managing director for the Newport Beach office of Los Angeles-based Travers Realty Corp.
Big law firm leases in the past year include deals for Bryan Cave LLP, Fisher & Phillips LLP, Jones Day and Newmeyer & Dillion LLP, among others.
Those four deals alone,all of which were expansions of space or new local offices altogether,were for more than 180,000 square feet of space, or nearly the size of a smaller office tower.
Law firms “remain steady sources of demand for the class A (office) market,” said Royce Sharf, executive vice president for the Irvine office of tenant brokerage Studley Inc.
Unlike many skittish local businesses, the mood of much of the area’s legal community is one of “guarded optimism” for 2009, said Sharf, who in December represented Jones Day in its 10-year, 55,000-square-foot lease.
That deal, at Maguire Properties Inc.’s 3161 Michelson tower in Irvine, was the largest law firm lease signed in OC last year.
There’s still plenty of risk involved for landlords once they’ve signed big-name legal firms, including the possibility of the firm closing up shop.
In September, San Francisco-based Heller Ehrman LLP, a 700-lawyer firm with a 118-year history, dissolved after merger attempts failed and several partners left. The shuttering resulted in the closing of 13 offices across the globe, including in Los Angeles and San Diego.
Several of those offices reportedly struck big leases in the months prior to the firm’s dissolution, which has led to at least two landlord-led lawsuits in the past month.
In the firm’s hometown, its landlord,333 Bush Associates NF LP,filed an $85 million suit against Heller Ehrman. Another landlord for its Washington, D.C., office filed a separate $31 million suit.
Heller Ehrman filed for bankruptcy in late December. Its filing reportedly listed six landlords among its 20 largest creditors.
OC Office Closure
In OC, the biggest legal office closure last year was for the Newport Beach office of Morrison & Foerster LLP. The firm shuttered its local office in June, while opting to serve clients here from its Los Angles and San Diego offices.
The company took up several floors of space at Irvine Company’s Newport Gateway building at 19900 MacArthur Blvd. Records show that two floors of space at the building are still up for sublease, with a term running through 2015.
Brokers expect Morrison & Foerster’s high-end, heavily built-out space could be hard to fill,unless another law firm or professional service firm decides to take over the lease.
Morrison & Foerster’s local closing and the dissolutions of firms such as Heller Ehrman and Thelen LLP are expected to give landlords some pause when signing up legal tenants.
Among other moves, landlords are expected to require additional guarantees prior to funding a law firm’s tenant improvements, according to various local brokers.
But not all brokers see that happening.
Rents are dropping, space is prevalent and tenant improvement concessions being offered by landlords remain high, Travers’ Parker said. Due diligence by the landlords might also be taking a back seat.
In a tighter market with little vacancy, a landlord is often more likely to scrutinize the financials of a law firm before agreeing to a lease, said Parker.
Now, with the office market as soft as it’s been in years, a landlord might not be as stringent with the scrutiny due to its weakened leverage,especially for a large national or international firm, Parker said.
But the lighter restrictions shouldn’t cause the landlords too much hurt as many law firms are poised for growth in 2009. But that doesn’t necessarily mean they will be taking more space.
In 2008, a sizable number of large firms committed to big office deals in OC and elsewhere in Southern California, while also giving them space to grow, said Parker.
Smaller and regional firms, particularly in OC, backed off from long-term leases, he said.
Moving into 2009, those same trends are likely to continue, although the volume of law firm leases could be smaller, Parker said.
“There are very few deals in the marketplace right now,” he said.
