So-called Big Law firms in NYC have been minting money. Profits per partner have been skyrocketing (over $5M, with some getting near $10M), along with billing rates now around $3,000 an hour. What could go wrong?

Yet we just saw a venerable law firm, Weil Gotshal & Manges, blow up when supposedly profits per partner were over $5M last year. It is now winding down. And it fell suddenly, like a rock in a pond.

From the point of view of the real estate world, the mega GM Building now has a 400,000-square-foot hole in its tenancy, since Weil has been leasing that much space for many years.

I guess there are some discussions going on between ownership and its lenders. But fortunately for ownership, the high-end office market in NYC is smoking hot, so I guess it will work out.

To get right to my point, a law firm is exactly like a bank without the FDIC. All it really has, all it really owns, is the desire of the partners to stick together. As one of my partners succinctly put it when I was running the firm:

“Bruce, all of the assets of this company go down the elevator every night. Your job is to make sure they come back in the morning.”

By the way, this same partner also said to me:

“Bruce, if I had your job, I’d jump out the window!”

So think about this for a moment. If the applicable law firm is not that good, it is probably worth very little, if anything. But if the partners in the firm put their hearts, souls, brilliance, insane hard work, talent, and a chunk of luck into it, the firm becomes valuable.

The value, of course, is in the lawyers that are behind the brand that was built. That, plus their loyal client base.

And therein lies the problem.

The more valuable the law firm becomes, the more attractive it is to competitor firms.

And as we just saw with Weil Gotshal, the most valuable lawyers are the ones with the biggest books of business. Even a storied franchise firm like Weil is subject to having its star rainmakers poached.

And it gets worse still. If just a single major player departs, the headhunters (like a swarm of locusts, or army ants, or the ten plagues) descend on the law firm, sensing it is a wounded fish. Maybe one more highly valuable partner departs, and then, yes, it is a run on the bank, as there is more and more pressure for partners to jump ship ere it sinks.

Okay, this is about real estate, and I am talking about law firms.

According to ChatGPT, which sometimes knows everything and sometimes not, there are about 4 billion to 4.8 billion square feet of commercial office space in the US, and 10.5% is leased to law firms.

That is somewhere between 420 and 504 million square feet of space leased to law firms.

My obvious point, to landlords and lenders, is that law firms, especially the strongest and best of them, are not as safe as they appear.

Having said that, I am told that historically law firms have had an exceptionally low default rate. This is usually because of personal liability and counter-cyclical resilience, i.e., downturns in business often generate more legal work.

So why worry?

I will tell you why historical default rates may not continue. My assessment is a combination of:

  • The acceleration of change in the business world, whether you count AI or tech, etc. All of this messes up clients and the stability of law firm revenues.
  • The incredible wealth generated by some law firms, which puts other law firms on the defensive. There are a few law firms that are so powerful that all other law firms are essentially at risk from the mega players. Whether anyone likes it or not, these mega firms have the power to put even a healthy rival out of business.
  • A general acceleration in the lack of loyalty among partners, in favor of chasing the highest dollars.
  • The talent wars, which, as in every industry today, are brutal and getting brutal-er.

All of this creates a witches’ brew, ironically, not for the smaller or weaker firms, since they likely don’t have partners with a client base that can pay Big Law $3,000-per-hour fees. Instead, the witches’ brew applies to the most profitable and successful firms.

So should real estate players lease to law firms? Absolutely! They are one of the best businesses and as antifragile to AI and the changing world landscape as anything. My article should not be read to the contrary. But at the same time, real estate owners should have a care as to how strongly fused together the underlying partnership is. And they should consider how likely it is that all those assets they are lending to will indeed come back up the elevator the next morning.

Bruce Stachenfeld, aka The Real Estate Philosopher™