Legal tenants have taken full advantage of the current situation in San Francisco by seizing opportunities to relocate their offices and secure prime space in safe, vibrant areas of the city, often downsizing their footprint in the process. The 25,000-square-foot (sf) floor plates that were previously desirable are being overlooked in favor of smaller sub-20,000-sf plates that better serve legal occupiers. This is partially due to a rise in smaller and/or interior offices, digital law libraries and file rooms. Who can blame them? Landlords have made it compelling for law firms to relocate in the market and recognize the corresponding expense with relocating. TI credits are higher than they’ve been in the past, and free rent offerings have seen an uptick as well. It’s not uncommon to receive an offer with greater than a year of free rent and over $200 psf in TI on a 10-year lease, and legal occupiers are taking landlords up on those deals.
While vibrant locations and efficiency gains from smaller floor plates can be monetarily advantageous, they don’t paint the full motivational picture behind relocations. It’s often easier to secure a new lease and build it out than it is to renovate while in place. The shift in design is also a factor; firms are consistently looking to create welcoming and collaborative spaces that help foster a communal environment and unite their attorneys and staff. In addition, legal tenants in San Francisco are less concerned with traditional in-building amenities and instead are looking at geography, parking, floor plate efficiency and the surrounding area. They‘re seeking good restaurants and bars, neighborhood vibrancy, secure parking, and views of the water and bridges.
What else is driving legal tenant downsizing?
Aside from floor plate efficiency, location and compelling landlords, downsizing for legal occupiers is also being driven by universal individual office sizes, shifting attorney-to-staff ratios, the logistics involved in renovating in place vs. building out a new space, cost savings and, as mentioned before, digital filing and law libraries.
Firms previously sought out larger floor plates because they had more interior space, but digital law libraries, digital filing rooms and attorney-to-staff ratios have lessened the need for interior space. The optimal floor plate for San Francisco law firms is nearing 500 sf per attorney on average, and most 25,000-sf floor plates are not conducive to lower square-feet-per-attorney ratios. They are even less conducive when universal office size strategies are implemented. Even though attorney offices are getting smaller and firms are adopting hoteling, attorneys are gaining a great deal in the office space.
Collaboration and community-centered office spaces that are equally fit to focus on work and entertain clients are becoming the norm. Major law firms in San Francisco are enthusiastic about these transformations.
How has leasing activity fared in the past and present? What’s in store for the future?
Past leasing activity in San Francisco has historically been driven by lease expirations, with annual totals fluctuating as existing firms renew leases and new market entrants secure minimal space—if they decide to enter at all. The graph included below illustrates this point further—2017’s total leased sf doubled in 2018 and 2019, reaching a high before falling off in 2020 and 2021 and then slightly recovering in 2022.
At 326,000 sf, legal leasing activity in San Francisco during the first half of 2023 has been strong but driven by expirations or termination rights. Gibson Dunn, Wilkie Farr & Gallagher, Shartsis Friese, Squire Patton Boggs, and Gunderson Dettmer have transacted so far this year taking more than 20,000 sf each. Four of the five are relocating or establishing a new office within the San Francisco market to take advantage of increased TI, free rent and the lower hard costs of building out office space.
The year is expected to finish strong with expiration-driven tenants who expect to lease a total of 400,000 sf before the end of the year. If deals are delayed into 2024, it may be the most active year for legal tenants that San Francisco has seen since 2019. Longer-term demand exists as well, and several well-known firms, many of which appear on the Am Law 200, are currently in the market and are expected to transact within the next 2-5 years. Prepare for more activity to come in the law firm sphere in San Francisco.
