Fishing Where the Fish Are: The Ten Best Locations in the U.S. for Law Firm Expansion

There are a variety of ways of defining legal marketplaces.  Certainly there are markets for specific practices and there are markets within industries.  But the licensing of lawyers largely dictates that much of the buying of legal services occurs within geographic markets.  Accordingly, the size and growth potential of geographic markets should play a major role in law firm’s strategic decisions as to where they allocate their capabilities.

As a boy, my father would take me fishing and give me a simple bamboo pole with a hook and a worm.  I wanted a real casting rod but he explained that despite the value of being skillful and having sophisticated equipment, the key to fishing was being where the fish are.  I suspect the same is true for developing legal business and it is much easier to grow law firm revenues in marketplaces where the volume of legal work is growing.

Growth in the U.S. Legal Market

We estimate that the total market for all legal services performed in the U.S. will reach $257 billion in 2012.  This amount represents a 49% increase over the past ten years.  Despite two recessions, the industry has sustained an average annual growth rate of just under five percent.  The largest portion of this market, $115 billion, is business services followed closely by consumer services at $100 billion.  Consumer services include legal fees paid to plaintiffs’ attorneys even though business or their insurers typically pay those amounts.  Legal services to governments, non-profit organizations and other clients total $42 billion (non-profits include many healthcare facilities and educational institutions).

These estimates are extrapolated from data released from the U.S. Economic Censuses for 1997, 2002 and 2007.  The Census Bureau counts revenues by the location of the office reporting the revenue.  Therefore, a legal project performed in Kansas City by lawyers with a firm in New York would typically be counted as New York revenue.

We find that growth of legal services consistently react to three variables: the growth of gross metropolitan product (the local component of GNP), growth of population and the growth of employment.  Growth of population is a powerful influence on overall legal markets, but that influence is greater on consumer clients than business clients.  That is, there is a link between population and business activity but it does not correlate to growth in legal fees as directly as population affects consumer related legal services, particularly plaintiffs’ litigation.

Growth of employment, on the other hand, has a very direct correlation to business legal services both because employment is reflective of changes in the volume of business activity as well as the act of employment itself creating the need for a certain level of legal services.

While we take all three variables into consideration in the estimates of legal markets, if there is a single factor that most closely maps demand for legal services it is Gross Metropolitan Product.  The value of the production of goods and services in a metropolitan area – or more precisely – the growth or decline of that value largely dictates “where the fish are.”

Of course, there are a number of other factors to consider when making a decision on where to invest a law firm’s growth resources.  The number of lawyers pursuing the legal spend and the competitiveness of the market, as well as the cost of doing business in various markets play a significant role in the decision.   But, most importantly, the presence of synergistic relationships in a geographic market with a firm’s existing clients should be a driving feature in strategic market decisions.

But, taking all of this into consideration, we believe there are a number of legal marketplaces that represent the greatest opportunities for law firm expansion.  The following, in our opinion, are the top ten.

Ten Best Locations in the U.S. for Law Firm Expansion

1. Dallas.  ($5.39 billion legal market) Rated as one of the fastest growth cities in the next five years for both population and employment, Dallas enjoys a below average cost of living and cost of doing business.  Although Houston has even higher potential for growth, its fortunes are heavily tied to energy and healthcare, whereas Dallas has a more diversified economy involving finance, international trade, cattle, regional distribution and energy.  The city sustains high hourly rates (for a non-capital market city), is surprisingly under-lawyered compared to much of the country, and has a sufficient spread of strength among a number of powerhouse law firms to keep the market competitive.  Yet, no national or global firms are headquartered in Dallas signaling either that Texas is a strong enough market that firms don’t have to look elsewhere or the notorious volatility of Dallas firms causes them to implode when they become too large.
2. Austin.  ($1.54 billion legal market) The success of Dell Computer and the desire of the University of Texas grads to stay in the city have put together a winning combination of “Dellionaires” with available capital and a highly educated workforce.  The result is the consistent rating of the city among the best places to start a business and live.  Austin is consistently in the top ten cities in the U.S. for population and job growth but despite the arrival of outposts by national firms ranging from DLA Piper to Wilson Sonsini, the city remains under-lawyered for its potential growth, which should be huge in a recovering economy.
3. Charlotte/Raleigh. ($2.05 billion legal market) Over the past ten years, Charlotte has been one of the fastest growing legal markets in the country.  Much of this growth has been driven by the consolidation of the banking industry permitting Charlotte to enjoy competing with Atlanta as a major business market force in the South.  But while Charlotte has received most of the attention, few places beat across-state neighbor Raleigh and its Research Triangle for ongoing growth potential. The combination of major universities continuing to spin-off high-tech and medical product companies, and a strong service sector attracted by the “half backs” (high net worth retirees who moved to Florida from the North, couldn’t take the heat, and moved half way back to settle in North Carolina) have caused the Raleigh-Cary metro area to project high growth in both population and employment.  Now, the success of Charlotte and the increasing banking base in North Carolina is pushing Raleigh to increase its customarily low work production and billing rates.  The win here is probably a statewide perspective.
4. New York City. ($39.31 billion legal market) Despite the cost of doing business and the challenge of London for corporate formation to avoid Sarbanes Oxley, the Big Apple continues to be the legal center of the world.  High billing rates, access to talent, and the combination client pool of local companies and out-of-towners brought to New York by its capital markets makes the city a virtual necessity on the locations list of virtually every US and global law firm of note.  Yet the city takes careful planning and patience.  Like blackjack, the odds may be in your favor over the long-term, but the risks equal the rewards, especially for the firm that seeks immediate return on investment.
5. Miami. ($6.87 billion legal market)  For years Miami was overlooked as a legal market because of its tightly controlled Cuban business market and lack of a large corporate base.  Now, with the expansion of the Latin and South American trade markets and the lack of top quality legal capability in that region, Miami has become the capital of international trade and a growth center for global legal services.  As a result, Miami leaped past Boston, Atlanta, Houston and Dallas on the list of the largest U.S. legal markets.
6. Chicago.  ($12.58 billion legal market)  Among large legal markets, Chicago consistently offers the best risk/reward ratio for law firm expansion.  Although hit hard by a slumping real estate market, the international strength of Chicago’s major law firms and the city’s position as a national and global transportation hub supports the inclusion of the city among the fastest growing areas in the country for population and employment.  The city’s high billing rates and the profitability of its premier firms are combined with a comparatively low cost of doing business.  While the legal market is extremely competitive, it is also among the most industrially diverse providing a broad array of opportunities and a strong potential for continued growth.
7. San Diego.  ($2.85 billion legal market)  For years San Diego was viewed as the weak point of California’s legal markets due to its position as a military center and a location for cost conscious government contractors and relatively low net worth retirees.  Then, seemingly overnight, the city became a center for the life sciences industries and out-of-town firms descended on the sleepy city.  Now, San Diego is the 13^th largest legal market in the country, approximately the same size as Minneapolis, Seattle and Detroit.  Of course, this growth has not gone unnoticed by the California firms but expectations are good for both the life sciences industry and the San Diego legal market.
8. Atlanta.  ($5.0 legal market)  Among riskier opportunities is the fast growing Atlanta legal market.   The city is projected to have the second highest population growth in the country over the next five years and, unlike some other Sunbelt locations where the growth is heavily retirees or lower skilled foreign workers, Atlanta attracts highly educated professionals.  The city has been held back by its traditional economic dependency on Coca-Cola and Delta, but the combination of low costs of living and doing business, an attractive workforce and the world’s busiest airport, will add to its growth as a corporate headquarters city.  Plus the longtime stranglehold on the city’s best work by two law firms is giving way to more competition as those firms increasingly focus their sights nationally and internationally.
9. Northern Virginia.  The entire Washington area is over-lawyered, but the strength of the Northern Virginia area is that it offers multiple levels of growth potential. The area serves as a tech center for the nation’s second largest legal market.  At the same time, the growth of the entire Virginia coast from Alexandria through Richmond to Hampton Roads, as a business center separate from the government-related functions of Washington, offers excellent opportunities for sophisticated legal practices.  Further, the Northern Virginia area continues as one of the most attractive areas for foreign corporations to open US facilities.  Not surprisingly, Forbes magazine has named Virginia as having the best business climate for five years in a row.
10. Charleston.  ($629 million legal market)  Easy to overlook as a sleepy Southern city, Charleston has been attracting major industry through South Carolina’s business friendly tax policies.  The region is a major port and is developing into a major manufacturing center for cars and aircraft, including Boeing’s 787 Dreamliner.  While the legal market is doubling in size, South Carolina continues to be desperately under-lawyered for the growing demand.  Presumably that will assist with the regions biggest drawback, sub-standard hourly rates.

Two obvious omissions are Houston ($5.38 billion legal market) and Los Angeles ($15.71 billion), both of which are projected to enjoy large population growth.   However, the population growth of both cities is expected to be heavily Hispanic which will support consumer legal services but do relatively little for the business demand.  Further, the comparative dependence of both cities on single industries, energy in Houston and entertainment in Los Angeles, for the most sophisticated and profitable legal work is cause for concern.