An Interview With: Tom Fulcher Part 1

New York-based Studley is one of the top commercial real estate firms focused on tenant representation with 450 in 18 offices in the U.S. Fulcher, 47, grew up in Falls Church, Va., went to William & Mary, worked four years on Capital Hill for Rep. Frank Wolf, got an MBA at the University of Virginia, and started working for Studley in 1985. Today (with Lois Zambo) he co-manages the Washington office, and has a leading practice advising law firms and non-profits.

Bisnow: How has the brokerage business changed during your 20 years?
Pretty dramatically. It’s become much more specialized. When I started, the normal model was to have a senior person who’d been there a number of years working with a young person fresh out of school. The junior person would be on the phone making cold calls, and the senior person would be running the deals. But the old model didn’t provide the critical mass of services. Now, we specialize much more. For example, financial analysis has become an integral part of what we do. Before, the junior person might be doing some basic math on the calculator, now we have a person with masters’ degree in finance as a full time analyst working on numbers all day, comparing the cost of one option to another. That analysis is then used not only to help tenants understand their options, but also to help landlords understand theirs.

Any other other new roles?
We also have project and construction management services, which weren’t part of the model 20 years ago. That used to be a separate business. Now you get the project management people involved almost at day one, helping explain what the various costs are going to be, the schedule, the value of the air conditioning system, and so on. Strategic planning is another new area. That’s stepping back to get the full picture rather than looking only at the specific problem of a lease coming up in two years. It’s really taking a look at a client’s business itself, what’s the best way to manage that business, what’s the best way to structure the occupancy, should a company own, should they lease, etc. As the different brokerage firms have come to offer these things, clients have come to expect them. As a result, the teams have gotten bigger. A team used to be two people. I’m now part of a team that has 13.

You have to provide more sophisticated offerings because of competition, but also because the size of the transactions has gotten bigger?
Yes, absolutely. When we worked with Arnold & Porter to get them into their headquarters, which was about 400,000 square feet in the mid ‘90s, one of the questions at that time was how big a law firm can get in Washington. A major issue is that the bigger you get, the more opportunities there are for conflicts of interest within the firm. No one at the time imagined that you could take that amount of square feet around here. It was a leap for them to take as much space as they did. Now, the Corporate Executive Board takes 600,000 square feet and Wilmer leases over 500,000 square feet. In other cities big transactions have always happened, but it’s a relatively new thing in Washington.

Is the physical splitting of the back-of-the-house functions of a law firm from the other functions a new trend we’re seeing in order to deal with the fact there’s not many 400,000 square foot offices available?
Yes, when a firm gets that big, there’s a real opportunity to split things off. But it doesn’t always make sense. You need to look at the floor plates of different buildings to determine whether or not it makes sense to take space off-site or not. Lawyers are wrapped around the windows, then you look to see what you have left. If your floor is small, you can put other functions in the basement or send them off-site. If you have a really big floor, say 50,000 square feet like at Washington Square, you have a lot of space on the interior. In that case, there might not be a need to go off-site since there is a significant amount of interior space to use for support functions. It depends on the firm and the building. Because the level of support can be so significant for the large firms and the costs of real estate so significant, law firms are much more willing to consider splitting than they were in the past.

Do big law firms consider headquartering in Virginia and Maryland? Not really. The lifeblood of a law firm is keeping and recruiting people. If a firm is competing against three or four other firms for IP attorneys, for example, you don’t want to be the one that’s out of the amenity base, away from the core. It’s difficult for a law firm to make a move that dramatic. They like the amenities and there’s more of a professional atmosphere downtown.

Do you sense that much of the prestige factor for law firm location now is not for the clients, but for recruiting?
Yes. There are some firms that say, “We’re good, but we can be in a B-building.” Other firms say, “We are at the top of the market attracting top talent and we need to be in a place that reflects that. Our space reflects it, our building reflects it, and the amenities we’re able to provide reflect it.” Real estate has really become part of the branding effort.

If you want to have impressive law firm offices, is it true you’re just going to have to pay a lot more for the build out than the tenant improvement allowance given in the deal?
Actual costs go well beyond the conventional $60 or $70 allowance for a Class-A building. At the end of the day, the number that we look at is what it costs to get to the point where the lawyers sit down and get to work. With a full build-out, lights, air conditioning, and furniture for an office-intensive space that’s not fancy, you can expect to pay $100 a foot. For high-end work, law firms can reasonably expect to pay up to $150 to $180 a foot.

How do you deal with tenant construction allowances not keeping pace with escalating construction costs?
The tenants need to understand that when they’re taking a look at moving into new space, the allowance they’re going to get is not going to cover the costs. Construction costs have gone up as a result of first, the Chinese building so much and taking all the steel and a lot of other materials. Certainly a few years ago residential wasn’t an issue at all. Now it’s an issue of taking up land that would have otherwise gone to office and taking labor that would have otherwise gone to building out office projects. Then you had Katrina and Rita that drove up the cost of things because of the shipping disruptions and the cost of oil. They will continue to drive things up because of the demand for the materials to replace damaged buildings and roads. All these things are contributing to rising construction costs. We are telling our clients to expect cost increases on base building or tenant work of as much as one percent per month.

Why does a firm like Akin Gump at 1333 New Hampshire Avenue renew its lease instead of building a new marquee building in the East End?
Not having represented them, I’m conjecturing about this. People get into a location and they like it. There are no big buildings in Dupont Circle that would be a suitable relocation alternative, and Akin Gump probably likes being across from the Metro. From Northwest Washington and Virginia and Maryland, it’s easy to get to 1333 New Hampshire. Cost-wise, it’s certainly a lot cheaper to stay in the space you’re in. When you’re renegotiating a deal, a lot of the dynamics have to do with what any particular party’s next best option is. And if a firm feels like they can stay put and the landlord says, “I don’t want to have to suffer the risk of downtime, and I don’t want to have to rebuild your space and chop it up into pieces for 15 different tenants,” the landlord is more likely to make concessions that will be valuable to the law firm. A lot of times you find that a firm’s space doesn’t work. It was built it back in the ‘80s, and it doesn’t fit today’s culture or operations. They might have evolved from a firm that didn’t have a lot of litigation to a litigation specialist and need totally different kinds of offices. But to the degree that a firm can stay and it is happy and comfortable, that is what they do.

What’s it like dealing with law firms?
Lawyers challenge you because it’s their money, and they’re smart. If a lawyer is on the “space committee,” they know all their smart partners are going to question them for years. Every day when they come to work, they know if something doesn’t work out they are the person the partners are going to come to.

“Challenge” is a euphemism for drive you crazy?
No, the clients who don’t challenge you are the ones you worry about more because you want them to get engaged in the process and understand all the trade-offs and decisions. A firm might make a decision to go to a building where the garage doesn’t work as well as desired and it will be an irritant every morning and every evening, but the partners made a conscious decision to save money. They need to know and acknowledge the trade-offs before they make a commitment. We want our clients prepared and not be surprised by the trade-offs.

With respect to Studley, you purposely don’t do things like property management or landlord representation. Why?
The founder of our firm, Julien Studley, in 1954 was working in real estate and realized that the landlords had a lot of expertise in real estate and had good representation. The tenants didn’t have anything. They were just going out and finding deals, and didn’t know how to navigate a very complicated process. Julien decided to stick to the tenant side and we have kept that focus for the entire time we have been in business. This allows us to aggressively represent our clients because we’re not representing the tenant in the morning for 50,000 square feet, and then in the afternoon trying to win business for a 1 million square foot landlord’s portfolio. There would be a big conflict of interest in that. Over time, other firms have bought into the tenant-only philosophy and the niche has become more crowded.

How are you paid: by hour, retainer, or percentage of transaction?
The last. A commission is paid after the transaction is done, that’s how tenant representatives are paid for the most part. It is a system that seems to work. If a deal doesn’t happen, it’s painful for tenants to spend a bunch of money on something that didn’t get done, and tenants like motivating their rep to get a deal done with what is essentially a success fee.

What lesson do you have for someone entering the tenant rep business?
If a client has to call you up and ask you what’s going on, you should consider it a personal failure. You need to be on top of the process and keep them informed constantly. If you’re not comfortable being in front of them and telling them how it’s going, you’ve failed. You always need to be thinking: Where do we go from here? Because that’s why you are there and why you were hired in the first place—to solve problems on some very important and expensive issues facing your clients. You need to enjoy not having structure and be ready to do something new for each deal.

In the next issue of Bisnow on Business’ Real Estate Weekly: The WilmerHale deal. First-hand accounts by Studley’s Fulcher, WilmerHale managing partner Bill Perlstein, and Arnold & Porter real estate partner Steve Porter.