U.S. office landlords share lawyers' pains

NEW YORK (Reuters) - U.S. office building owners are feeling the pain of their lawyers.

Since the credit crisis went into strangulation mode late last year, U.S. commercial real estate markets have seen a steep drop in demand for space, chiefly from the financial sector.

That's not difficult to understand given that the sector comprises the largest tenant base in some major cities, such as New York, where one-third of the office space was occupied by banks, hedge funds, private equity firms and other investors and lenders.

But right behind those tenants were the lawyers -- those who worked on the big deals for the financial sector and other corporate transactions, only to see that work disappear.

"The litigation budgets of all the corporations have been slashed, and as a result of that we're all getting hurt," said Sharon Nelson, co-author of the upcoming book "How Good Lawyers Survive Bad Times."

As of July 26, major U.S. law firms had laid off more than 13,311 people since the start of 2008, with more than 11,000 of those losing their jobs in 2009, according to Law Shucks, an online tabloid that tracks movements within the nation's 250 largest law firms.

Over the past year, a spate of venerable law firms, such as Heller Ehrman; Thacher Proffitt & Wood; Thelen Reid Brown Raysman & Steiner; Brobeck, Phleger & Harrison; and WolfBlock have shut their doors.

Law firms have been affected as their clients' businesses have dried up. Those law firms specializing in mergers and acquisitions and structured finance have been hit the hardest.

"It has been pretty amazing to see how many law firms that are gone," Nelson said.

The decline in office space demand from law firms prompted the construction of a Manhattan skyscraper to come to a halt and a major developer to default on a loan on a San Francisco building.

Last month, developer Hines and Sterling American Properties said it would turn over 333 Bush in San Francisco to lenders Brookfield Real Estate Finance and Munich Hypo Bank after Heller Ehrman collapsed. The 118-year-old firm was the building's major tenant, leasing 250,000 square feet.

Boston Properties Inc (BXP.N) in February was forced to stop construction of a 1 million square-foot building on the west side of Midtown Manhattan after law firm Proskauer Rose backed out from a tentative agreement for about half the space.

LAW FIRMS GET MORE ATTENTION AS FINANCIAL SECTOR SHRINKS

As the financial sector has cut back on its office space needs, law firms have become proportionately more important to landlords.

In Manhattan, which dwarfs any other U.S. office market, the legal sector represents about 10 percent of office space occupied there. It accounted for 17 percent of the leasing activity in the first half of 2009, up from 14 percent a year earlier, according to real estate services firm CB Richard Ellis Group Inc (CBG.N).

"The leasing market substantially slowed down, but the legal sector had a larger piece of a smaller pie," said Mitchell Rudin, who heads up CB Richard Ellis's U.S. team specializing in the real estate needs of law firms.

By midyear, leasing by law firms in Manhattan was off 16.5 percent to 1.4 million square feet, according to CB Richard Ellis. In Los Angeles, it was down 42.7 percent to 238,745 square feet. San Francisco leasing plunged 56.6 percent to 342,559 square feet.

"None of this is near enough to tilt the market, but they do represent in major cities a significant portion of the velocity," Rudin said.

While a number of law firms have folded, a significant number of their lawyers have been absorbed by other firms, such as Cozen O'Connor.

Other factors are also cutting the space demands of law firms.

Law firms have been centralizing their real estate decisions and increasing standardization to control costs. Some have reduced the amount of space per employee and have gone back to the old practice of having first-year associates double up in offices.

"You've seen a significant number of them revisiting their operating model and emulating what traditional corporations have done in certain respects," Rudin said.

(Editing by Gerald E. McCormick)