Return to Profit Growth; Optimism in 2024; Office Space
Return to Profit Growth
Profits per equity partner (PEP) among surveyed law firms grew by 6.6% in 2023, according to Citi’s Global Wealth at Work Law Firm Group (Law Firms Witnessed a 'Return to Profit Growth' in 2023 ("Return to Profit"), Justin Henry, 2/9/24, American Lawyer). There was dispersion however, as 39% of firms surveyed reported decline in PEP (Return to Profit).
Despite annual profit growth for some firms, billable hours for Q4 were the lowest since 2005 at 115 per lawyer per month, according to Thomson Reuters (Law Firm Financial Index Q4 2023 Executive Report “LFFI Report”, 2/12/24). The LFFI Report explains that rate increases and broader use of alternative fee arrangements were the drivers of revenue growth, not high billables. The Report opines that advances in A.I. may further decouple billable hours from revenue growth (LFFI Report; ‘Detached’: Why Big Law May Rethink Its Focus on Productivity, Andrew Maloney, 2/27/24, National Law Journal).
Optimism in 2024
Optimism abounds with law firm leaders projecting demand growth of 3% for 2024 (compared to projections of 1.5% at the start of 2023) (Has Big Law Finally Returned to a Point of 'Normalcy'?, Andrew Maloney, 2/26/24, American Lawyer, citing Owen Berman of Wells Fargo Legal Specialty Group). Firm leaders and industry observers predict an uptick in transactional demand, coupled with continued demand in countercyclical practices (After Moderate Revenue Gains, Law Firms Plan for Growth in Both Deals and Litigation, Andrew Maloney, 1/30/24, American Lawyer). Deal activity appears to be off to a good start (Deal Watch: Wachtell, Paul Weiss and V&E Lead $26B Oil Merger as Deal Activity Soars, Patrick Smith, 2/12/24, American Lawyer; Dealmakers Plan to Keep Investing in Private Equity Practices Amid Higher Expectations for 2024, Patrick Smith, 1/18/24, American Lawyer).
Office Space
U.S. law firms leased a total of 7.8 million square feet of space in 2023, 45.1% more than in 2022 and the highest since 2019 (8.4 million square feet) (US Law Firm Leasing on Upswing in 2023, Hitting Highest Mark Since 2019, Brenda Sapino Jeffreys, 2/23/24, American Lawyer (citing Savills Legal Tenant U.S. Law Firm Activity Report Q4 2023)). 43.6% firms expanded their space vs. 28.5% in 2022. And a greater number of firms stayed in place (56% in 2023 vs. 33.9% in 2022). Piers Wates, who represents law firms in lease transactions for CBRE, notes that the legal sector is relatively active in terms of leasing volume, with a balanced mix of renewals vs. new leases and expansions. In contrast, other industries are more heavily weighted to renewals due to a focus on cost containment, perhaps indicating that the legal sector is more resilient to outside economic factors.
Hybrid work has not necessarily helped law firms reduce the number of offices; most firms have coalesced on 3 or more days in the office each week and sharing an office is only feasible at 2 days or less (More Law Firms in New York Opt for Larger Spaces, Patrick Smith, 1/8/24, American Lawyer). Piers Wates notes that the advent of hybrid work has led to some space reductions; but space design, particularly the move to single-size offices, continues to be the most prominent way for law firms to create efficiencies within their office footprints. Piers also notes that law firms are placing a strong emphasis on the needs and wants of their attorneys, with the thought of leveraging their office space as a competitive advantage for recruiting and retaining top talent.
