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The Lawyer UK 200 2015: which firms are getting the most out of their property?


The Lawyer UK 200 2015: which firms are getting the most out of their property?

New UK 200 data shows early signs of momentous change at UK legal offices, as firms seek out real estate strategies that ease the pressure of soaring rents, promote flexible working and attract high-quality staff and clients.

There are few items more pressing on a law firm leader’s agenda than the efficient use of real estate.

This, in a nutshell, is the reason for The Lawyer’s first-ever UK 200 Real Estate report. This data-rich analysis, produced in association with JLL, includes a wealth of statistics and benchmarking measures taken from the UK 200 2015 research.

For any law firm leader looking for insights into how to make the most efficient use of their real estate portfolio it is essential reading.

Detailed look around

This year more than 100 law firms in the The Lawyer UK Top 200 provided data related to their office space and costs. (The term ‘real estate cost’ in this report includes the annual cost of the square footage controlled by firms in the UK, including rent, rates and service charges.) This is the third time that such data has been collected alongside the detailed financial and employee information but the first that it has been published as a standalone report.

This report focuses specifically on real estate issues for law firms. It should be noted that the largest City firms – including some of those with the largest use and cost of real estate – declined to provide real estate information.

The full report also includes significant information included from JLL on recent law firm real estate transactions, as well as real estate trends across the UK and internationally.

It also includes insights into some of the human resource issues and future trends in office occupancy from leading workplace experts to help you shape your future real estate strategy.

Key findings

The key findings from the report include: three year trends, which show that cost and space per lawyer is increasing. 

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The average cost per lawyer now hovers around the £18,200 per year mark while the amount of space per lawyer (now at 483 sq ft per lawyer) seems to be on a upward trend – increasing about 7 per cent since 2013.

Firms are paying a high cost per square foot. The total revenue of the firms providing data amounted to £3.9bn, taking a total of 7.49 million sq ft of space in the UK with a total spend on UK office space of £271.4m.

 Across the sample, law firms paid an average of £41.13 per sq ft and generated an average of £589.78 revenue per sq ft. (Not all firms provided office space, spend and revenue data.)

Across the entire sample of both London and regional firms, 44 per cent are paying between £20 and £40 per square foot. Nineteen per cent are paying less than £20 per sq ft and 13 per cent are paying more than £60 per sq ft.

There is a wide variation in revenue per square foot being generated. Almost three-quarters of firms are generating between £250 and £750 of revenue per square foot. However, there is almost a quarter of firms (23 per cent) generating over £750 of revenue per square foot.

New law firm models are yielding law firms substantial savings. Keystone, for example, achieves second place in UK revenue per cost, demonstrating that more flexible working can yield substantial real estate savings without negatively impacting employee wellbeing.

There is opportunity for significant real estate savings in revenue per cost of square foot – over two-thirds (69 per cent) of firms are achieving £10-£20 of revenue per cost of square foot, yet 27 per cent are achieving over £20 and 10 per cent over £30.

Lawyer space and workplace satisfaction

There is a high cost of real estate per person employed. The legal sector is paying a lot of money to house its workforce. Some 30 per cent are paying between £2,500 and £5,000 per person and 26 per cent are paying £5,000 to £7,500. Many – 22 per cent – are paying over £10,000 per person. The average annual cost per person across the sample was £8,032.56.

There is a significant variation in how much space is available for each person – with roughly equal numbers of firms providing less than 150, 150-200 and 200-250 sq ft.

The lowest was 19 sq ft per person and the highest was an astonishing 687 sq ft per person.
The average space per partner is 1,274 sq ft and for fee-earners it is 325 sq ft. Average space per staff member is 195 sq ft.

HR experts do not think that office space has an impact on recruitment – although some lawyers disagree – but there is a view that it affects retention.

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London versus the regions

Comparing regional centres, the highest prime rents are in London West End (£117.50 per sq ft per year) and the lowest are in Belfast (£15.50), Nottingham (£19.50) and Southampton (£19.50).

The top 10 deals in the second quarter of 2015 accounted for a total of 366,654 sq ft and all of these were in the City. Half of these deals were US firms.

Manchester dominates the largest regional deals. Six of the 10 largest deals in the major regional UK centres were in Manchester.

On average, firms are paying £65.94 per sq ft in London compared to £30.63 per sq ft outside London, less than half.

The cost per lawyer in London is, on average, £24,675 compared to just £14,683 outside London.
And lawyers generally have more space outside the capital – an average of 399 sq ft per lawyer in London compared to 486 sq ft elsewhere.

Three-year trends

The Lawyer UK 200 real estate survey is unique in having not only financial performance information alongside real estate use and costs, but in having this data for the past three years so that emerging trends can be seen.

The average annual cost per lawyer now stands at £18,237, a 23 per cent increase on 2013. Average space per lawyer – now at 483 sq ft – also seems to be on a upward trend – increasing about 7 per cent since 2013.
Lowest and highest users of space.

In terms of overall space use, as would be expected, the smaller firms use the least – although the alternative firms, such as Keystone, use significantly less than expected for their relative income.

However, this is not the case when we consider those firms that use the most space compared to their revenue.

Lowest and highest UK office costs

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Looking at the total costs of office space in the UK, there is a considerable difference between those paying the most and the least – particularly as a proportion of total revenue.

The smallest firms and lowest users of space are spending between 1.6 per cent and 5.2 per cent of their total revenue on office space, whereas the largest firms are spending between 4.2 per cent and 10.1 per cent of revenue on real estate.

The top 10 firms in this year’s table of the highest UK office expenditure is similar to the top 10 listed last year, although CMS has leapfrogged DWF as a result of its most recent London deal. Taylor Wessing makes an entry into the top 10, pushing out Osborne Clarke in the process.

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Among the next 10 highest UK costs are Osborne Clarke, Weightmans, Trowers & Hamlins, Withers, Mills & Reeve, Clarke Willmott, Shepherd & Wedderburn, Watson Farley & Williams, TLT and Penningtons Manches.

Shepherd & Wedderburn is in a similar situation to Weightmans in that the £77 per square foot it pays in St Paul’s Churchyard puts it in the top 10 London costs table while on a UK view its £47 per square foot is average.

Despite the firm having to sub-let 4,000 sq ft London space after growth plans stalled in the wake of the recession, chief executive Stephen Gibb maintains that the office has been a key asset when recruiting staff, especially in the tight Scottish trainee market where the prospect of a seat in the heart of the City has proved a major draw (TheLawyer.com/PricesThroughTheRoof).

Lowest and highest cost per square foot

It is interesting to see which firms – across their portfolios – are paying the highest and lowest per square foot per annum. There is only one firm with a presence in London in the top 10 paying the least per sq ft.
All those in the top 10 highest per square foot per annum are in London. Among these are: Taylor Wessing, Olswang, Forsters, Wedlake Bell and Fieldfisher.

The range for costs of space per person is surprising. Just over half (56 per cent) are paying between £2,500 and £7,500 per person. And there is some variation – correlated with the size of firms – in the revenue per cost of square foot for different types of staff.

Cost per square foot for partners in the largest firms (£99,709) is significantly more compared to the smaller firms (£23,870), where the difference with other types of staff is also less variable. It seems that the space status hierarchy is still alive and kicking in the largest firms.

Revenue per square foot

Cost is only one part of the equation, however. When considering the amount of revenue generated for each square foot of space there is an interesting pattern: almost three-quarters of firms are generating between £250 and £750 of revenue per square foot.

However, almost a quarter of firms (23 per cent) are generating over £750 of revenue per square foot. Among the top performers are large and small firms, niche firms and some of the new law firm models. (Note that the largest City law firms did not contribute data and therefore do not appear in the top 10 list).

Surprisingly, the top three firms generating the least revenue per square foot are all small regional firms. Forster Dean is a specialist personal injury, medical negligence and consumer law practice with offices throughout the North East.

Thorntons has 426 staff (171 fee-earners) with seven offices in Scotland taking 100,339 sq ft and generating £19.4m revenue. Trethowans is a 25-partner, 151-staff firm generating £11.2m revenue from two offices covering 45,286 sq ft in Southampton and Salisbury.

While it is perhaps no surprise to see Express Solicitors (the Manchester specialist personal injury firm) and Keystone (one of the new breed of dispersed law firms) at the top of the list for firms generating most revenue from their space, others are more of a surprise.

Macfarlanes has just over 600 staff generating £159.6m from 137,911 sq ft in London (Cursitor Street, EC4) costing £6.68m. That equates to a cost of £48.46 per sq ft.

Interestingly, Wedlake Bell, Fieldfisher and Sackers all appear in the top 10 for paying the highest per square foot per annum – clearly they are making that real estate investment work for them.

Revenue per cost

This figure is calculated by dividing the firm’s revenue by the total square footage cost.

There is considerable divergence between the lowest revenue per cost (£8.87) and the highest (£61.60) although across the sample we can see that the majority (over two-thirds) are generating £10-£20 which would indicate there is significant improvements (and savings) to be achieved across the legal sector.

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Another way of looking at the data is to compare revenue against overall office space and costs. The bubble chart above shows a correlation between amount of revenue and annual footage costs with a clear difference between the largest and smaller firms. The innovation at CMS is providing a cost advantage over other large firms such as Eversheds and Clyde & Co.

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Future trends

The Lawyer UK 200 Real Estate Report concludes with an analysis of future trends in firms’ use of property and the impact on the fee-earners and other staff within them. The findings may surprise you. According to the workforce consultants quizzed for the report, offices of the future must be a blend of what they term My Space, Our Space, Busy Space, Shared Space and Find Space, and accommodate the needs of four different types of worker: Meerkats, Dolphins, Loyal Dogs and Spiders.

A technology entrepreneur argues that a large percentage of offices – perhaps 40-60 per cent – will become variants of co-working spaces, and central London will be reserved for weekly get-togethers with a continuation of the trend for fewer, but longer, commuting journeys.

In short, it looks like there will still be legal work and a legal market, but just not as we know it. And at the heart of the changes will be the office.

Why real estate management has never mattered so much

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The UK legal market is clearly entering an exciting phase. In addition to the re-emergence of growth to the UK market, a number of changes are transforming the sector. From continued consolidation and merger and acquisition activity to new market entrants and technology-driven change, today’s UK legal market is both thriving and dynamic. Yet it is also an increasingly competitive place to do business. As client demands and fee pressures increase, and new players disrupt the market, there has been a notable focus on operational efficiency within law firms. In this environment the importance of effective real estate management has never been greater.

The Lawyer’s UK 200 real estate report provides a timely resource for law firms as they look to drive more value and better outcomes from their real estate. Real estate is often the second-largest cost on a law firm’s balance sheet after its people, but it is also clear that the value of well-managed real estate goes well beyond a line item on the balance sheet.

Leading firms are transforming their real estate portfolios to support operational cost reduction through use of lower cost nearshore or offshore centres. Law firm offices are being redesigned to enable greater collaboration, cross-fertilisation of ideas and expertise as well as improving productivity. Technology is increasingly supporting greater mobility and allowing firms to reduce the space they require in high-cost locations. In this increasingly competitive environment the brand value of law firm real estate has returned as a key consideration for real estate decisions. We are also seeing further strategic investment and growth by US firms in London as more of them are seeking a growing presence here.

With all this in mind, it is evident that the real estate question is a business challenge that has moved beyond the remit of the head of property: this impacts HR directors, IT directors and operations as firms strive to be the best places to work using technology and office space design to drive better efficiency, employee attraction and retention, while delivering best-in-class legal services to their clients.

JLL is committed to continuing to work with UK law firms to help them deliver the most from their real estate across the UK and beyond. We hope you enjoy The Lawyer UK 200 Real Estate analysis.

Alexander Low, head of legal sector services, JLL

This article was published in The Lawyer