Texas: The Final Frontier?

Sep 25, 2015 by 0
Texas: The Final Frontier?

As law firms continue to proliferate across the globe, there are fewer and fewer opportunities for firm expansion. Clients drive office openings as regional demands pressure firms to expand into new markets. Until recently, one such market was considered more of a niche home for firms specializing in energy, albeit a large one. However, this market, Texas, has recently drawn firms pushing to expand not just their energy offerings, but their litigation, high-tech IP and real estate practices as well.

Since 2012, 17 Am Law 200 firms have opened offices in the Lone Star State—through either merger or organic growth—with the bulk of them in Houston. This represents nearly a 30% increase in the number of Am Law 200 firms in Texas from 2012 alone. 2014 was a banner year for Texas office openings as 11 different firms established offices in the state. Over one-third of Am Law 200 firms now have offices in Texas, with many more planning their first foray into the market over the next few years.

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So why Texas? Big oil has been synonymous with the state for over a century; it seems improbable that the industry is driving this new expansion. The energy practices are partially responsible for this influx of firms. Until the recent downturn, riding a wave of high oil prices, oil companies continued exploration, inciting a pushback from the public and government, both of which increased demand for legal services.

As California and New York real estate prices skyrocket, Texas has become an attractive destination for both individuals and companies. Chinese investors are flooding the real estate market despite the shaky yuan. Some estimates project that the population of Texas will double by 2050 as immigrants and transplants clamor for affordable real estate. The growth is so rapid that Houston is projected to overtake Chicago as third-largest U.S. city in the next decade.

Firms and companies are especially attracted to Texas given the non-existent state tax on LLCs and partnership organizations. 54 Fortune 500 companies already take advantage of Texas’s lenient taxes, making Texas the second-largest home to Fortune 500 companies after New York.

Over the last few years, Texas Governors Rick Perry and Greg Abbott have pushed an initiative to lure California companies to Texas with promises of less regulation and lower taxes. They managed to convince over 60 companies to relocate to Texas, moving thousands of jobs southeast.

Toyota is the latest to join this list as the Japanese automaker plans to move its Southern California headquarters to Plano, Texas. The move has already engendered an office opening as one of Toyota’s representative law firms, Frost Brown Todd, opened an office in Dallas to better service the client’s needs. In the non-legal space, Toyota’s advertising firm, Saatchi & Saatchi, is looking to expand into Texas as well.

Business is not only booming for companies in Texas, attorneys are also benefiting from a bullish market as lateral activity continues to skyrocket. Over the first (nearly) three quarters of the year, 2015 has posted the highest number of attorney moves since the recession. In fact, this year’s total is nearly 230% greater than 2009’s.

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These moves are diversified as well. Both regional and global firms are in hiring mode. However, regional firms Vinson & Elkins, Bracewell & Giuliani and Baker Botts rounded out the top three for most net associate losses. International firms moving into the Texas market are poaching many of these attorneys. These firms are able to leverage their large platform and offer market-leading salaries to entice top partners and associates to defect from regional firms.

K&L Gates had a rough three quarters in partner attrition but several firms followed close behind, easing concerns about the firm’s health. K&L Gates’s loss was McDermott’s gain as they added 11 net partners over the first three quarters, the most of any firm. (Head over to the Lateral Link website for interactive graphs showing, on a firm-by-firm basis, associate net hiring and partner net laterals.)

The composition of attorney ranks in Texas Am Law 200 firms is not dissimilar to Chicago’s. University of Houston and University of Texas are the two most-attended law schools for Am Law 200 attorneys in Texas. Together, Texas schools were attended by nearly two-thirds of all practicing Am Law 200 attorneys in Texas. The last third is largely composed of proximate schools including Baylor and LSU. Nonetheless, nearly 10 percent of Texas attorneys attended Harvard Law School.

Though Texas is touted as a popular destination for recent grads—first place in Bloomberg Business’s Best Cities for New College Grads—its overall attorney composition is nearly identical to the rest of the U.S. Texas’s comparative dearth of young partners could lessen concerns of succession planning as there are comparatively more opportunities for younger partners to inherit business from the indefatigable senior partners pressing back against the mandatory retirement age. As the market continues to expand, junior partners and senior associates will benefit from this glut of open positions and work.

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Demand for new hires is up significantly in the Texas market this year. IP hiring is somewhat meager compared to the past, but litigation and corporate are both experiencing strong demand. Also comparatively hot are labor and employment and real estate. Demand is evenly split between regional and international firms with no one firm able to claim clear supremacy. Though local attorneys are usually preferred by firms, Texas firms are increasingly turning towards out-of-state attorneys to keep up with their demand.

Houston has the most posted demand of any Texas city. Though traditionally known as an energy hub, Houston has moved beyond its specialized focus as it continues to diversify its offerings. As a more balanced market, it is unsurprising that Dallas has a posted need for a breadth of practices.

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A confluence of factors is pushing Texas to become the final—or at least the next—frontier of law firm expansion in the U.S. Between an increasing population, corporate growth, the high number of relocations, friendly tax laws, lax reciprocity rules and a comparatively cheap cost of living, several Texas cities are poised to leap into the first tier in the near future, along with New York, Chicago, D.C., Los Angeles, and San Francisco. Firms will be smart to bet big on the state and acquire a base of talented attorneys before there are none left.