There is a strong sense that the property market is changing in important ways for law firms of all sizes as occupiers.

A volatile market in the City has led to deals being signed on very different terms in recent times, with a firm looking for space now paying £15 or £20 more per square foot for a significant site than a firm with identical requirements that was in a position to sign a new lease in 2008 or 2009. There are also huge disparities between regional legal centres that are home to firms which compete with one another on a national basis. On the traditional ‘high street’, meanwhile, commercial sites a little further out, and even space in shopping centres, are becoming part of the picture.

As Tracey Byer, head of UK occupier services at DTZ explains, this is all happening against a background of change for legal services: ‘Footprints of UK premises are decreasing as technology improves and flexible working and hot-desking techniques feed a reduction of space needs by up to 20% in some cases.’

She adds: ‘The other goal is to track, measure and improve or optimise space utilisation, which can, for historic reasons, be at a level as low as 65% to 75%.’

London callingIn London, City office rents fell a staggering 60% as the financial crisis unfolded, though from that base they have risen 40% – 25% of that in the past 12 months. Firms which were able to take advantage of a fall in market rents have experienced a dramatic change in their overheads. Both Pinsent Masons and Stephenson Harwood signed leases priced at the mid- to late-£30s per square foot for office space that would come in at the mid- to late-£40s if they were signed now. They were also able to complete these deals at a time when the market average for a rent-free period was three years – it has now fallen to two.

What is driving the market? King Sturge City office partner Jeremy Attfield explains: ‘It’s the lack of prime built stock.’ Pinsent Masons took 150,000 square feet, and Stephenson Harwood 120,000. Attfield says: ‘They were lucky they had a "break" at the right time. Now, CMS Cameron McKenna, Bird & Bird and Field Fisher Waterhouse are all looking for space. They will have to box clever – maybe even consider an exit and refit. Otherwise, for pre-lets now, they could be looking at £55 a square foot.’

For firms with a lower space requirement in the City, some new spaces are opening up. Attfield points to the example of transatlantic tie-ups, where the US firm involved typically has 20,000 to 30,000 square feet of office space. ‘On merger, they can get rid of that,’ he says. ‘Hogan & Hartson got rid of space inside two months of merging with Lovells.’

Following redundancies, or moves to outsource work to cheaper locations, some law firms have now managed to ‘restack’ their offices to create space that can be sublet. Viv Williams, director of the 360 Legal Group, explains: ‘Law firms based in city centres are swiftly realising that the cost of accommodation per square foot does not justify back office and finance functions. Hence we are seeing firms such as Osborne Clarke and CMS Cameron McKenna outsourcing these ancillary functions and only keeping expensive office space for fee-earners.’

‘Clifford Chance and Allen & Overy are subletting,’ Attfield notes, ‘and Simmons & Simmons is marketing 42,000 square feet’.

The creation of such space is not just the result of a recent contraction in demand for services in key practice areas. It is also about what Byer calls ‘right-sizing’: ‘This approach includes a strategic review of how legal services and advice are delivered to clients, and how and where tasks are undertaken,’ she says. ‘This strategy has driven consolidation, with two locations closely located consolidating into one; working practices, such as going open-plan cellular; and greater flexibility in space options or lease length.’

National pictureOutside the City, the picture varies hugely. As Andrew Glynn, head of real estate at TLT Solicitors, puts it: ‘The market in the City is a law unto itself. It doesn’t work like any other part of the country.’

In the larger legal centres outside London, the price of commercial office space in Bristol and Manchester is relatively buoyant, but flatter in Birmingham and Leeds. ‘The market in each regional centre is different,’ Glynn explains, ‘and has a lot more to do with how much development was going on when the market changed, than the performance of businesses that occupy that sort of space.’

Attfield confirms this picture: ‘In the regions, you don’t have the peaks and troughs of central London.’ He notes that HBJ Gateley Wareing in Manchester ‘did a good deal from the fallout from the Halliwells collapse’. Perhaps some of the best deals to be done, Attfield argues, are by national firms: ‘Eversheds, for example, has a property portfolio of a million square feet. That would give them the option of moving space requirements between offices in quite an imaginative way.’

Byer notes: ‘If firms are willing to take second-hand, fitted-out space, they will find not only greater availability, but also exceedingly competitive lease terms.’

Opportunities are not just there for large commercial firms. For the 80% of law firms that have five partners or fewer, their property needs are also worth reviewing, even if the property is owned by the partnership or retired partners. Williams explains: ‘The property is often held in a SIPP [self-invested personal pension] and these practices could present an interesting opportunity for property funds and investors who may well wish to purchase high-street premises once market conditions improve.’

Williams points out that new business structures, and outsourcing options, will also affect smaller firms, which should plan strategically: ‘They may or may not continue to operate as a law practice but some are suggesting that this type of "boutique firm" could be the future, with the work being completed elsewhere.’

That could include space not traditionally used by law firms, he notes: ‘There is also an interest in premises in shopping malls, as with the recent Quality Solicitors opening in Lewisham, and this could become a growing trend in the future. I wonder, will the work be carried out on these premises?’ He adds: ‘Shopping centres are unlikely to be the norm, but this is interesting nonetheless.’

Flexibility in leases is also deemed crucial in delivering value for law firms. Byer explains: ‘As law firms continue to make changes in their locations and client service delivery processes, they will be looking for more flexible leases, or to ensure break options are negotiated wherever possible.’

In many cases, flexibility will come before other considerations. Glynn says: ‘You have to plan ahead and think strategically with property, as it is fairly illiquid on the balance sheet. We’ve tried to work on a 3-5 year horizon.’ As a result, he adds: ‘In an uncertain market, tenants may be keener on flexibility than rent-free periods.’

Breaking outIn the City, demand for substantial pre-let space is already making it harder to achieve the break clauses that tenants would want. ‘With break clauses, tenants all want them there, but where there is pressure on prime space, it is harder for them to get the flexibility they want generally,’ Attfield says.

Existing break clauses have also determined the ability of firms of all sizes to take advantage of changes to the commercial property market, or even to make decisions on issues such as consolidation. ‘Break clauses become particularly important if a firm is looking at or has undertaken a merger,’ Byer says. ‘Law firms, like any commercial occupiers with a good covenant and an upcoming lease expiry or break option, will be in a stronger negotiating position when it comes to leases.’

Outside the City, Williams notes: ‘For those firms which are able to take advantage of well-negotiated break clauses in lease agreements there are some exceptional deals to be had.’

The desire for flexibility has, over time, driven down lease lengths. Whereas Williams says there are still many 25-year leases, with five-year reviews, being run down, new leases tend to be 15 years or less, not withstanding a small upswing in the City. Attfield notes that large leases may be closer to the upper end: ‘For large deals, you’re back to 15 years for over 100,000 square feet – a lease length that enables you to get appropriate conditions in place.’

But for many deals, Byer observes, the days of agreeing to 15-year lease lengths ‘are pretty much over, especially in light of forthcoming IAS 17 lease accounting changes and the proposed impact on corporate balance sheets’.

Green is the colour If there was an expectation that the recession would make businesses take their commitment to the environment less seriously, that has not been evidenced in the commercial property market, where tenants and landlords have shown a steadiness in their commitment to limiting and cutting the energy use associated with their property needs.

In Hitting the green wall, a report published earlier this year and conducted by the British Property Federation, Taylor Wessing and communications and research agency Spada, the importance afforded to sustainability was seen to have dipped only slightly since a similar survey was conducted a year previously. The report concluded that a ‘slight dip overall indicates remarkable resilience in an industry that has borne the brunt of a major recession, suggesting that commitment to the sustainability agenda is real and durable – rather than lip service paid when economic times are good’.

There can still be conflict between landlords and tenants over this issue, but as Attfield notes, this is mostly around whose energy efficiency policy should be used: ‘Some landlords will stipulate that the tenant has to abide by certain rules – tenants with their own processes and policies on how they might achieve energy efficiency have their own rules and won’t like that.’

Byer explains that this commitment is here to stay: ‘Energy-efficient buildings usually have lower maintenance and service charges, which plays a part in reducing operating costs – and this is important to tenants, including law firms.’ She adds: ‘On the other hand, most energy-efficient options are newly built, and tend to have some of the highest rents in the market. Cost is certainly a challenge to the importance of energy efficiency, and will be a case-by-case basis decision.’

Taylor Wessing is the occupant of one such new build, a decision that managing partner Tim Eyles remains pleased about: ‘Our commitment goes beyond our physical building, although the move in 2008 to our London office at 5 New Street Square – a new development profoundly influenced by sustainable design and low-energy use principles – marked a new chapter in our sustainability initiatives.’

Eyles notes that there is a practical benefit to having experience of such a building: ‘When advising our clients it’s important that we can use our own experience to demonstrate the commercial value of embracing the sustainability agenda.’

Glynn is equally sure that there is no turning back on this issue: ‘Energy efficiency is there in the minds of most occupiers of any significant amount of space.’ He adds: ‘When the carbon reduction commitment comes in next year, then the less energy efficient the building you are in, the more likely it is to start costing you more. Energy efficiency will become increasingly important.’

Moving outLooking to sign a new lease in a volatile market may appear a risky prospect. But provided firms are clear about their own strategic direction, the current state of the property market has its advantages for occupiers. As Williams concludes: ‘If any firm has strategically planned their future, now is a great time to plan and negotiate an office move.’

Attfield notes that, even in more competitive property markets, ‘there may still be good deals to be done – say if the landlord is hurting, or the landlord needs to refinance urgently. If they need to start a building with an anchor tenant, there are possibly better terms too’.

In looking at a new site, Glynn advises, it is important to think of the firm’s people as well as deals that could be struck. Reflecting on his own firm’s move of its London office to 20 Gresham Street, he notes: ‘When taking space, in addition to the leadership team, we tried to get input from the rest of the business. That’s important.’