Professional Space Users Cinch Belts

June 13, 2013

Taking a cue from corporate America, professionals such as lawyers, accountants and doctors are reassessing their real estate needs and sometimes opting for less space.

It's in response to increasing costs, competition and regulation amid a sluggish recovery and the rise of technology that lets employees work from just about anywhere.

Law and accounting firms are concentrating on improving efficiency by reducing the amount of square footage per employee, say experts with commercial property brokerage Cushman & Wakefield and accountant Deloitte.

Meanwhile the Patient Protection and Affordable Care Act, better known as ObamaCare, also is placing emphasis on cutting costs in the health care industry, says John Wadsworth, director of the health care services group for commercial real estate brokerage Colliers International.

"The major component of (ObamaCare) is to do more with less," said Wadsworth, in Colliers' Irvine, Calif., office. "Reimbursements to doctors and hospitals are shrinking.

Cutting Occupancy Costs

The fresh scrutiny largely represents a departure from how professional tenants have traditionally viewed their office space needs. Corporate America has downsized to roughly 176 square feet per employee from 225 square feet in 2010, and square footage will likely keep falling over the next few years, according to findings in a 2012 survey by CoreNet Global, an association of corporate real estate professionals. But law firm ratios are as much as 400 square feet per employee and 900 square feet per attorney, says Sherry Cushman, head of the legal sector advisory group in the Washington, D.C., office of Cushman & Wakefield.

Creating more efficiency is a potential cost savings that attorneys can't ignore, she adds, especially in an era of competitive fee structures. Plus, real estate is a firm's largest fixed cost behind only salaries.

"Law firms are trying to maintain profits, which is harder to do now than ever before," said Cushman. "So they're looking at how they can create better space that's cheaper on a per-attorney basis.

That doesn't necessarily mean finding buildings with lower rents. Average office rents have ticked up between 1.4% and 6.8% over the last year in major markets and tech hubs such as Los Angeles; Boston; New York; San Jose, Calif.; and San Francisco, according to commercial property researcher Reis (REIS).

Instead the firms are pursuing strategies such as shrinking and standardizing partner and associate offices, Cushman says, and are moving accounting, human resources and other support functions to cheaper markets.

Earlier this year, global law firm Arnold & Porter announced that in 2015 it would move its Washington, D.C., office into a Boston Properties (BXP) building now under construction. The firm agreed to a 20-year lease for 375,000 square feet.

The move represents a space downsizing even as the law firm anticipates growth, says Richard Alexander, managing partner at Arnold & Porter. Features helping to accomplish that include advances in technology, smaller offices for lawyers and more natural light in the building's interior.

"Historically, law firms have not been very efficient about their use of space," he said. But like other businesses, he adds, the firms are now taking steps to improve their operations.

Workplace Of The Future

Accounting firms are taking similar steps to cut operating expenses, says Darin Buelow, leader of Deloitte's real estate and location strategy practice. Deloitte, for example, operates in about 80 cities and generally has around 15 leases up for renewal annually.

Over time, the accounting firm realized that total occupancy — a measure of how much time employees are in the office — was as low as 25%, Buelow says, because the workers were frequently out visiting clients.

Over the last few years, Deloitte has been taking the renewal opportunity to reorganize into what Buelow calls an open "workplace of the future." That broadly means eliminating cubicles and introducing long tables with an outlet and phone at multiple workstations. Office sharing among partners also is becoming a standard, he adds.

So far Deloitte has executed the strategy in Detroit, New York and San Francisco, among other cities.

"There continues to be cost pressures that large and small firms alike are facing," he said. "The smart firms are constantly scrutinizing their real estate spending.

Given the low interest rate environment, buying instead of renting could save professional firms money they'd otherwise spend on a years-long lease, acknowledge Buelow and Cushman. But owning can become unwieldy for large organizations with lots of partners and most prefer to spend their capital on the business, they say.

Owning may make sense for small boutique or family-owned firms, they add. Often those professionals put the building in a trust for future generations.

"But if you have a better use for capital than tying it up in real estate, then leasing is a better choice," Buelow said.

Doctors' Decision

Owning real estate vs. leasing it also is appealing to doctors, Wadsworth says, but the rollout of ObamaCare has made the decision trickier. Small physician groups are joining large health care systems and hospitals to better deal with the costs and complexities of the new law, Wadsworth says. Plus, an anticipated doctor shortage in the coming years has prompted the larger providers to recruit small practices.

Only 36% of doctors are independent today compared with 60% in 2000, and that trend is expected to continue in all but the toniest of communities such as the Beverly Hills or Newport Beach areas in California, Wadsworth adds.

Owning still makes sense in cases where a doctors group can foresee its future, he says. But a hospital or health system is likely to pursue a solid practice of five to 10 doctors, and a bad real estate deal could muddy the merger.

"You don't need to be an accountant to determine that it's better to own than to pay someone rent for 20 years — every physician is aware of that," he said. "But with health care's somewhat uncertain future, you have to be as flexible as you can. Ownership is permanent."