The demand for legal services in California continued to pick up into the third quarter, fueling another quarter of strong revenue growth for law firms in the region, according to a report by Citi Private Bank's Law Firm Group.

Leading the 11 regions surveyed, law firms in Northern California saw a 5.3% growth in demand as measured by total billable hours logged. Following right behind, demand growth for Southern California-based firms accelerated by 3%. Both regions exceeded the industrywide average of 0.9%.

"What we're seeing is that California is in the growth days and certainly those two markets are viewed as growth markets for the legal industry, and I think it's reflected in the results," said Gretta Rusanow, head of advisory services for Citi Private Bank's Law Firm Group. "They have very strong results compared to the broader industry numbers."

Citi surveyed 190 firms, including 76 Am Law 100 firms, 54 firms in the Am Law Second Hundred and 60 niche or boutique firms. Overall, California firms have experienced strong revenue growth in the past nine months, thanks to demand and rate increases.

Revenue growth at Northern California-headquartered firms rose 8.3% in the first nine months of 2019, which was the second strongest, after Pennsylvania. Revenue growth for Southern California firms was up by 8.1%, while the national average was 5.1%.

Consistent with national trends, revenue growth for both regions outpaced expense growth. Expenses were up 7% at Northern California firms, and 5.7% for firms in Southern California. That was driven by compensation expense, which was up 10% in Northern California and 7.3% in Southern California, and to a lesser extent operating expense, which was up 4.5% in Northern California and 4.8% in Southern California. Industrywide, expenses grew by 4.7% for the first nine months.

The expense growth also reflects that head count is up in both regions, Rusanow added. The total lawyer head count at Northern California firms rose by 5.8% and at Southern California firms it was up by 2.5%. Both exceeded the national average head count growth of 2%.

In terms of lawyer billing rates, law firms in Southern California reported a higher percentage increase, at 5.4%, above the industry average of 4.7%. Northern California firms, on the other hand, saw rates grow by 3.2%.

"We're pretty upbeat about the 2019 results, we don't think there'll be a recession in 2020," Rusanow said. "We think that these are positive numbers, particularly positive for the California region."

Looking toward the year-end, Rusanow said she expects California firms' gross revenue to continue growing, as both regions have reported strong inventory growth. In Northern California, inventory growth was 10.1%, while Southern California firms saw inventory increase by 8%.

Industrywide, firms experienced inventory growth of 6.7% and a 1.5% lengthening of the collection cycle, Citi found.