Houston Commercial Real Estate Blog

Counsel Cut Costs On Office Space

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By Brenda Sapino Jeffreys
Texas Lawyer
March 02, 2009
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The troubling news about the nation’s economy may really be a glimmer of good news for Texas firms looking to cut costs by renegotiating their office space leases or moving to new space.

“If you are in the position right now where you want to stay in the building and you want to extend your lease, this is a great time to go talk to your landlord about different terms,” says Jim Leary, executive director for Akin Gump Strauss Hauer & Feld. “Some landlords are hurting, too, because they have overextended because they’ve bought new buildings over the past two or three years.”

Leary, who oversees Akin Gump’s leases from his office in Washington, D.C., says Akin Gump has been very active in recent years in managing its office space throughout its 13-office network.

“We have been actively doing this in good times and bad,” says Leary, who says the 913-lawyer firm has returned some space to landlords in recent years and is currently trying to sublease some excess space in a couple offices. He declines to identify those offices.

Akin Gump isn’t alone in seeing opportunity to cut real estate expenses, or to increase their space at better terms.

Miles Holsworth, executive director at Dallas-based Locke Lord Bissell & Liddell, says the 710-lawyer firm began to evaluate its leases as a part of due diligence prior to the October 2007 merger of Texas firm Locke Liddell & Sapp and Lord Bissell & Brook of Chicago.

“We were really in front of what’s going to happen in the market,” Dallas-based Holsworth says.

Since the merger, the firm has made several office space adjustments that have cut costs, he says. That includes subleasing a floor at its Chicago office, and combining offices in Washington, D.C., into new space subleased from Sprint, he says. In New York City, the firm negotiated a lease in Three World Financial Center that had been previously occupied by Morgan & Finegan. On Feb. 2, Locke Lord announced that 33 lawyers from Morgan & Finnegan, including 13 partners, joined the firm.

Holsworth says the firm, which has offices in 13 cities, is “saving a lot of money” in rents over the past year-and-a-half because of the space adjustments.

Meanwhile, Holsworth says, the firm recently entered into a new long-term lease in JPMorgan Chase Tower in Houston that gives the firm new space for a conference room floor and the opportunity to build out the space in a way that standardizes offices to two sizes. Currently, there are about six different sizes of offices, he says. The new space takes up seven-and-a-half floors, compared to the current nine floors, but Holsworth says the floors are contiguous and the firm will use the space more efficiently once a build-out is complete later this year.

Some Subleasing

Renegotiating leases isn’t on the table at some Texas firms.

M. Lawrence “Larry” Hicks, administrative partner in Thompson & Knight in Dallas, says the firm is not trying to renegotiate its leases, but did take on additional space in Three Allen Center in Houston about six months ago. The firm has sublet that space, he says, but the firm intends to add lawyers in Houston and will fill it over time, he says.

“We are always looking for ways to save expenses, but we don’t have an abundance of excess space,” he says.

Kevin Richardson, office administrator in Houston for Jones Day, says the firm has exercised an option to take on an additional half floor at 717 Texas in Houston later this year. The firm is now housed on two floors in the building and is in the sixth year of a 15-year lease, he says.

Richardson says the firm negotiated the expansion more than a year ago.

John Strasburger, the partner in charge in Houston for Weil, Gotshal & Manges, says the firm redid its lease in the Bank of America Center in Houston in 2008 by extending it and renegotiating a blended rate for the longer term.

“We did it because it was a good time to do it. The interesting thing is, it’s kind of like housing prices, they never seem to go down in neighborhoods you want to live in. The same thing is true of Class A office space,” he says.

Strasburger says the firm may be able to capitalize at bit on the down economy in Austin when negotiating a new lease there, because the firm’s current lease in the Arboretum area is up in 2010.

Dan Butcher, managing partner of Strasburger & Price in Dallas, says the firm is looking at its leases, even though most have significant terms left on them. The firm has offices in Dallas, Houston, Austin and Frisco.

“We haven’t made any decision, but we are evaluating whether this is a good time to look at extending our leases and get a better rental or lease rate right now,” Butcher says.

He says the most likely action is subleasing some space in Frisco. The firm’s office is in Hall Office Park.

Tenant Retention

The opportunities for firms to have leverage over their landlords when negotiating new long-term leases varies from city to city in Texas, says Bob Cromwell, managing director of the office services division at Moody Rambin Interests in Houston.

He says the citywide office space vacancy rate in the Dallas area is around 20 percent, while it’s only about 12 percent in Houston. He believes that’s because Houston’s energy-based economy has not been as affected by the economic downtown. Cromwell says the Austin office market is “overbuilt” a bit, but San Antonio is “holding its own.”

Cromwell, who represents building owners, says while tenants believe rents should be going down because of the economy, those rates haven’t been affected much yet. He says rental rates have jumped 30 percent in Houston since the last economic downtown in 2001, and he doesn’t see landlords giving up those gains over the short term.

He says many tenants are negotiating one- or two-year leases because they are waiting to see where the market lands.

Theodore Brakatselos, president of Houston Site Acquisitions, who helps clients find office space, says landlords are being a little more aggressive at trying to retain tenants. However, he notes that there’s a “certain level of uncertainty in the market.”

He says some clients are wondering: “If we sit and wait, will we get a better deal?

Theodore Brakatselos is the President of Houston Site Acquisitions, a commercial real estate company. He has over 17 years of experience in commercial real estate and has represented a broad range of tenants and landlords over his career including star-up companies, publicly held companies, and overseeing portfolios for institutional landlords & investors. You can reach Theodore at 713-789-8700 or via the Web at www.hsaleasing.com