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Trends & Conclusions from WWL

The status of gateway cities such as London, New York and San Francisco as “safe havens” has led to an influx of foreign investment, creating frenzied activity among investors competing for limited real estate opportunities. With this sharp rise in activity, law firms are turning their attention to staffing needs and reassessing their position in the market – resulting in a dynamic legal marketplace over the last year as some firms bolster their real estate practices and others quit the market for good.

Liquidity is everywhere. Not only is traditional lending back but international investors are driving up prices. Sovereign wealth funds from Asia and the Middle East and investors from China, Malaysia, Hong Kong and Singapore have been snapping up trophy properties in the US and European markets to access higher yields. As one lawyer said, “Too much money is chasing too few deals.” This has seen bidders accepting lower financial returns than expected, or else having to walk away. Secondary markets are also seeing more development as many investors become priced out of the gateway cities. What does this mean for the lawyers? “Work is exploding on all sides. It’s all active – acquisitions, joint ventures, leasing, financing.” Yet others were less enthusiastic. The situation has made it difficult for clients to win bids, meaning lots of work is not proceeding and the practice is unpredictable.
A 2013 survey carried out by the Association of Foreign Investors in Real Estate named London as the city with the best real estate opportunities for foreign investors, overtaking New York (top choice in 2012). These investors love office space, and London has several new skyscrapers to offer: the Shard, the Leadenhall Building and 20 Fenchurch Street, to name but a few. Driving much of the demand is the TMT sector, encompassing publishing houses, computer software companies, advertising agencies and start-up tech companies. According to research by BNP Paribas Real Estate, the sector will require 1.2 million square feet of additional London office space by the end of 2014. Areas such as Shoreditch and Old Street are particularly popular with TMT companies, and lawyers reflected on the new challenges developers face from occupiers requiring “creative office space”. As a result lawyers are seeing much more development work, and several teams have responded by bolstering their offering in this regard.
It is a similar situation in the US. The San Francisco bay area is booming and has been described as “the epicentre of the most rapidly growing technology sectors” by Wells Fargo Economics Group. Recent deals include leasing 714,000 square feet in an office tower under construction. As one lawyer remarked, “The San Francisco real estate market is on fire right now.”
In New York, prices are also soaring due to the vast amount of money chasing the same assets. The demand for housing has seen many older office buildings converted into condominiums while new developments for high-rise condominiums and multi-family projects are also popular. Currently, one of the most exciting ventures in New York is the redevelopment of Hudson Yards, already announced as home to TimeWarner’s new headquarters. At 17 million square feet, Hudson Yards will be the biggest private real estate development in US history – and a “dream come true” for those working on it, since the project is sure to keep lawyers busy for years to come.
Meanwhile, prime office yields in Sydney are above 6 per cent – making them attractive to investors from Tokyo, Hong Kong and Taipei, where the equivalent yields are less than 3 per cent. Chinese investment is also having an impact on the housing market: according to a report by Credit Suisse, Chinese investors are snapping up 18 per cent of all new apartments and houses in Sydney, and 14 per cent in Melbourne.
According to lawyers, finding deals for clients is the hard part. As domestic investors begin to feel priced out of key markets, they are starting to look to secondary cities in the US and the UK – or to continental Europe. English cities Leeds, Manchester and Bristol have fared particularly well, with Deutsche Bank leading a £142 million deal to buy Manchester’s One Angel Square in February 2013. Notably, Chinese fund Ginkgo Tree Investment, a wholly owned unit of China’s State Administration of Foreign Exchange (SAFE), was also involved in the sale. The investment was SAFE’s first European property purchase outside London.
Other areas of Europe are also seeing more interest, with property in Ireland and Spain prime targets for investors searching for better returns.
In the longer term it is expected that the emerging markets, with their lower prices, will become more attractive – but this development is yet to materialise. According to a recent survey titled “Global Investor Appetite”, commissioned by Nabarro and carried out by FTI Consulting, 68 per cent of those polled believe the attractiveness of the BRIC countries will increase in the next five to 10 years as investors seek higher returns.
All this activity has resulted in law firms reassessing their staffing needs and considering their position in the market. The cyclical nature of real estate ensures that if you are training or qualifying at a particular time, the likelihood of you becoming a real estate lawyer is slim. As a consequence of the most recent financial crisis, when real estate lawyers were not trained and many associates were laid off, there are now gaps on both sides of the Atlantic. With such a dearth of mid-level associates offering solid real estate experience, these practitioners are currently in high demand. Firms that did keep their teams intact (by employing policies such as flexitime) are now fighting to keep their associates rather than lose them to a firm offering a more attractive package.
Furthermore, with underperforming partners having been pushed out and associates trimmed, law firms are now looking to rebuild their teams – and creating a high level of lateral movement in the process. As one lawyer put it, “We are in growth mode but it is a focused growth – we are concentrating on building our joint venture, development and international expertise.”
In the UK, many magic circle law firms have made the strategic decision to exit the real estate market, while others have opted to scale back their operations to focus on core areas, such as corporate and finance. As a consequence, many partners have either had to face being de-equitised or else move on, which has propelled a great deal of movement among firms within the London market.
In contrast, however, some firms have chosen to commit to the practice, and have actively bolstered their teams – Macfarlanes, for example, which now has three lawyers listed in our guide, all of whom were lateral hires made between late 2011 and 2013. US firms have also been hiring: according to those in the market, they are seeking leading practitioners with broad experience and expertise to establish their Europe-wide real estate practices. Mayer Brown, for instance, hired Martin Wright in November 2013 to drive forward its European real estate practice; in that same month, Paul Hastings hired David Ryland.
Europe has also seen the increased division of the legal market. Institutions are becoming more commoditised and are looking towards regional or low-cost firms. In response, some firms have established regional offices – including Nabarro, which recently launched in Manchester, and Hogan Lovells, which has opened in Birmingham. These offices are also being used to capture London work and carry it out more cheaply. It is still important for many firms to keep back some routine work, as a means of training younger lawyers; others are concentrating solely on high-end or international work. One question that remains unanswered is: will those trying to cover all bases suffer on profitability? One lawyer explains that “you need to be smart about how you position yourself in the market” in order to capture the right type of work at the right price. Although there is more work available, and competition has consequently lessened, it still exists – and clients are very price-sensitive.
Having an international outlook was also cited as an advantage, due to the ability to refer work from one office to another and serve clients’ global needs. In fact, looking at the leading firms in our research (those with the highest number of experts recognised), the majority have lawyers listed from numerous locations (see figure 1).
Despite the obvious benefits that come from being part of a global network, several firms prefer to operate as specialists. Cox Castle & Nicholson and Hanna & Van Atta, for example, both have offices in California that exclusively serve the needs of real estate clients. There are definite advantages to working in a real estate boutique: not least the ability to be more flexible on pricing, a difficulty for real estate lawyers in larger law firms where hourly rates are more suited to the corporate work the firm is taking on. However, as investors begin to look towards emerging markets for returns, it is likely that a global network (or strategically placed offices) will become a higher priority for clients when choosing their counsel. In particular, sources claim that sovereign wealth funds prefer to have all their work handled by one firm for ease of use and simplicity.
It remains to be seen how the legal market might look in the next five years, as clients become more active in emerging markets and traditional real estate hotspots become less attractive. At present the USA is the most populous jurisdiction for leading real estate lawyers, followed by England, France, Canada and Germany. India and Mexico, two markets noted for their growth potential, also make relatively robust appearances.


The real estate market has emerged from the recession looking remarkably different than at the outset. While some firms have dedicated themselves to the practice, others have chosen to scale back and concentrate their efforts on alternative core practices. Among the remaining key players, the current challenge is to adapt to the changing investor client base and demands – either by increasing the firm’s capabilities in areas such as development, or by growing the international scope of the practice.


culled from

August 19, 2014

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