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Like the market itself, the commercial real estate practice is rebounding from a deep low. Tech companies expanding into new digs and an uptick in off-market deals are helping keep big-firm real estate departments busy in San Francisco. Some are even thinking about hiring again, but stress they’re going to be very cautious — and choosy.
“I laid off a lot of people. It was very unpleasant,” said William Murray Jr., who leads the real estate practice at Orrick, Herrington Sutcliffe. He said his San Francisco group dropped from 18 to 12 attorneys because of the recession, and he doubts they’ll ever return to those pre-crisis levels. “My standards for hiring are tougher. I want to make sure I hire only people who can make it through another tough downturn.”
Murray said it’s not easy to identify those people and they are few and far between, but he said the ideal candidate will have experience handling the type of capital market transactions Orrick specializes in and can show they kept themselves busy even during the recession.
DLA Piper partner Stephen Cowan, whose own group in San Francisco dropped from 25 to 15 lawyers since the real estate bubble burst, echoed the sentiment. The pipeline at his firm has more promising matters than last year, including multiple portfolio transactions, purchase and sales deals, among them a purchase of 24 properties across the United States worth around $850 million, and a new redevelopment project in Mission Bay. “Every single person is busy,” Cowan said, ticking off the matters: “We’re doing more leasing, more financing, representing lenders and more borrowers.” His group’s even handling a large acquisition with no financing involved, he said.
But he’s not yet ready to claim a comeback strong enough to warrant a hiring surge. “Law firm management and real estate partners are very leery of the depth of the downturn,” Cowan said. The upturn could be a temporary blip, he said, and hiring won’t pick up until his firm is sure of sustained business. “Thinning the ranks is very, very painful.”
Orrick partner Michael Liever said his real estate group has been handling more work for tech companies buying campuses or leasing more space as they prepare to expand, such as Facebook Inc.’s move into the former Sun Microsystems headquarters. Most of the action is happening South of Market in San Francisco, he said, and in Menlo Park and Palo Alto. Orrick has represented two landlords in negotiations with Apple Inc. for buildings across the San Francisco Bay Area, for instance. Murray says the team has handled four $100 million deals in the past three to four months — mainly acquisitions of properties or portfolios of properties. “We didn’t have anywhere near that volume in ’08 and ’09,” Murray noted.
In March, Orrick handled the Westin San Francisco hotel’s restructuring, representing Westbrook Partners, which bought the debt on the property and took a deed in lieu of foreclosure on the property. Media reports put the mortgage debt at about $150 million.
Orrick’s San Francisco office added one fifth-year real estate associate from a Chicago firm a month ago and a first-year is starting at the end of August. The firm will be hiring one or two more lateral associates in the fall, partners say, if the deals keep coming. The ideal candidate these days will have just the right mix of experience and fire in the belly, Murray said. “There are people that have a hunger and that love real estate and I think they end up surviving better,” he said.
Gibson, Dunn Crutcher, known for caution in lateral hiring in good times and bad, is also beating the bushes for the perfect candidates to add to its 14-attorney San Francisco real estate group. Firm Chairman Kenneth Doran said demand in real estate has surged. Gibson is in a different position than many of its peers, Doran said, because it didn’t lay off any attorneys during the downturn. This year, the firm added one of counsel in Los Angeles and is in the process of hiring another in San Francisco. “We are cautious and selective,” Doran said.
Charles Thornton, a San Francisco partner at Paul, Hastings, Janofsky Walker, said clients are still risk averse. He said he has more off-market deals in the works than usual, which aren’t subject to a public bidding process. Two are acquisitions of office buildings and two are other types of commercial properties, all in California. “You sign a confidentiality agreement,” Thornton said. “You negotiate directly.”
Thornton said he’s not sure why more negotiations are happening behind closed doors now. One driver might be the complexity of deals these days, and various pressures on sellers. The loans attached to a property may be in default, there may be issues between the borrower and the lender, or a seller may have a deadline to get certain assets off its books in this fiscal year.
All those factors make turning to a single reputable buyer more appealing than a public bidding process that tends to be more fraught with risk, including the risk the deal won’t close or will be negotiated down in price after the buyer has done due diligence, Thornton said.
Generally speaking, Thornton said, the hottest properties today are office buildings in major markets, like Silicon Valley, San Francisco and L.A., that are fully leased to credit-worthy tenants.
Joan Story, a real estate finance partner at Sheppard, Mullin, Richter Hampton in San Francisco, said work has picked up on the transactional side since last year, but certain areas continue to be hit and miss, especially on bigger projects. Story said residential development on the urban fringe will take a lot longer to recover. That — and the uncertainty many still feel about the permanence of the upswing in commercial real estate — has kept Sheppard’s San Francisco group steady at 17 real estate and land use lawyers. One new first-year associate will be coming on board from the firm’s summer program, but no one’s been added laterally so far this year. “We’ve not talked yet about any lateral hiring in the San Francisco office,” she said.
What would it take for the firm to jump-start hiring? “More deals,” Story said. “A sense that the pickup we see is not just sporadic but is sustained. I guess nobody really believes it yet.”
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