Legal Office Leasing Still Hasn't Caught Up to Pre-Pandemic Levels

Legal office leasing is gradually returning to pre-pandemic norms after seeing lease terms decline throughout 2021, according to Savills U.S. Law Firm Activity Report Q4 2021.

This jibes with nearly every major US office market including, New York, Los Angeles, Chicago and Washington, D.C., which in Q4 2021 posted its highest quarter of transaction volume since the pandemic began. 

The flurry of deals in Q4 saw leasing velocity up 18% compared to the prior year. It is likely a sign that tenants are more confident making long-term real estate decisions and ultimately return-to-office plans, even as hybrid work styles are likely to continue.

And as the second full year of the pandemic comes to a close, the legal sector is faring better than many industries, but leasing has not yet returned to pre-pandemic norms. 

Law firm leases completed in 2020 were primarily made up of transactions that were in progress prior to the pandemic, typically in response to upcoming lease expirations. 

Then, in the first half of 2021, there was a notable drop in leasing volume as many firms delayed decisions during the height of pandemic uncertainty. The low point in legal sector leasing was Q2 2021 when leasing volume fell below 1 million square feet for the quarter in the major markets across the US.

Pandemic Impacts Legal Sector Based on Market

New York saw the largest difference in annual law firm leasing averages compared to during the pandemic—leasing activity fell a staggering 44% in the sector. Washington, D.C., saw only a slight difference with law firms signing leases throughout the pandemic. 

In Chicago, law firm leasing jumped by 32% after the start of the pandemic, a number largely affected by Kirkland and Ellis LLP’s 2021 commitment to a new building of over 600,000 square feet, a lease that made up 55% of 2021 leasing activity in that city. 

Los Angeles’ legal leasing nearly doubled in 2020 and 2021 but leasing was spread amongst firms of all sizes. Houston has seen a notable decline in activity, driven by almost no activity in 2020 followed by a rebound in 2021.

In ‘Stay versus Go,’ Stay Prevails

The Legal Tenant analyzed 423 leases completed in the two years prior to the pandemic and the two years since the beginning of the pandemic and found a significant shift in the type of leases firms were signing. 

Prior to the pandemic, relocations were nearly double the number of renewals. After the start of the pandemic, renewals picked up dramatically, making the shift between firms choosing to “stay” versus “go” almost equal.

Prior to the pandemic, the legal sector saw many firms relocating as the state-of-the-art law firm space had changed dramatically from the previous generation. During the uncertainty of the pandemic, staying in place was the conservative choice until more clarity could be achieved surrounding the future of the workplace with many firms “kicking the can down the road” with shorter leases until they figured things out. 

More relocations are expected in the near- to mid-term as law firms look to attract and retain employees by creating workplaces with abundant amenities, collaborative spaces, and incorporating best practices on wellness and sustainability.

Downsizing Occurred in Nearly Half of 2021’s Leases

During the pandemic, the legal sector saw average lease terms decline from 110 to 88 months across the top legal sector markets (by leasing volume) as firms dealt with the uncertainty of the future of the legal office. 

The only outlier to this trend is Houston, which has consecutively seen leasing terms climb. However, by Q4 2021, the average length in lease terms not only recovered in markets that dropped but surpassed the term length seen just before the pandemic. 

In Washington, D.C, the legal sector’s average lease term has hit a peak of 159 months, New York reached a market-high of 143 months and, in Houston, the average reached 121 months as law firms became more comfortable with making long-term commitments and sought to secure the exceptionally favorable terms resulting from the soft COVID-era market conditions. 

Of the top 20 legal sector leases completed in 2021, 45% of transactions downsized from the previous amount of space leased. On average, firms that decided to contract shrunk by 23%. Almost one third of these 20 leases stayed in roughly the same amount of space, although, in several press releases associated with the transactions, there were mentions of these firms becoming more efficient regardless of the negligible change in space leased.