Recent times have not been the best for the Israeli office real estate sector. The slowdown in the tech industry in Israel and around the world, rising interest rates, political instability in Israel and of course the war have all contributed to a major slowdown, especially after the boom of 2021 and 2022. Market research has shown a significant drop in rental prices per square meter, and even some decline in occupancy rates, something the Israeli office market has not seen in a long time.
The slowdown seemed to continue, until three major deals were closed in one week, reshuffling the deck. Google leased 20 floors of the ToHa2 tower in Tel Aviv for NIS 155 million a year, while Palo Alto Networks, as revealed by « Globes, » is significantly increasing the number of floors it leases in the Alon 1 tower on Yigal Alon Street, and after 30 years in Herzliya, the venture capital firm Pitango is moving to the new Landmark tower in Tel Aviv. Perhaps we have been too quick to praise the Tel Aviv office market.
« The center of Tel Aviv behaves differently »
There is no doubt that the office real estate sector is experiencing a global slowdown, mainly due to the slowdown in the technology sector. Two years ago, record transactions for NIS 200 per square meter were completed in central Tel Aviv. According to the report by commercial real estate specialists Newmark Natam for the second half of 2023, office rents in one of the hottest neighborhoods of the time, Yigal Alon Street in Tel Aviv, fell by 27% in 18 months.
The last three transactions announced could mark a turning point. They are between NIS 130 and NIS 150 per square meter per month. This is a substantial drop from the previously mentioned peaks, but real estate professionals do not see this as a sign of a crisis, but rather a return to reason.
Newmark Natam Vice President Or Ben Zvi Klein said: « The records set two years ago are exceptions, and that is how they should be treated. The prices of the latest transactions are good market prices, which do not indicate a crash. These are minor changes and adjustments in the market situation, nothing more. »
Is this trend a sign of a recovery in the market as a whole? “Traffic has increased recently,” says Ben Zvi Klein, “but companies are taking more time than before to choose the tower and the neighborhood. They are taking advantage of the opening of new projects in convenient locations and have an alternative to the office where they have been located for years, which did not exist until now. A positive element for the resilience of the sector is also reflected in sublets (a tenant who rents the space that he has rented to another company). They are not long-term, but for two or three years. This indicates that companies assume that they will soon need the space again.”
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Itai Shafran, real estate consultant and partner at Economic Planning Solutions, explains: “In the office sector in Israel, you always have to divide things into two: Tel Aviv State and the rest. There are quite a few places that are facing stagnation, but in Tel Aviv, that is not necessarily the case. The city center is the heart of the office sector in Israel and it operates differently. Tel Aviv will continue to be the most sought-after city and a center of attraction mainly for the tech industry, and as long as that sector continues to recover, we will see more offers like this.”
What about the cities around Tel Aviv?
Beyond the big deals in central Tel Aviv, the reality in the cities surrounding the business capital is not the same. Cities like Petah Tikva, Rishon Lezion, Holon, Bat Yam and Bnei Brak, and even areas farther from Tel Aviv itself (beyond the distance of half a scooter battery in the parlance of real estate professionals), are facing weaker demand, despite the fact that office space there continues to grow.
Additionally, hundreds of layoffs have been announced this month in the tech sector, including Pagaya, which leases about 2,500 square meters of space in Tel Aviv’s Sarona Towers, and is laying off about 100 employees; fintech unicorn Rapyd, which leases about 11,000 square meters in Azrieli Towers, is laying off about 30 employees; Ness Ziona-based Moovit is laying off about 25 employees; and global tech giant Chegg is closing its development center in Rehovot, laying off 80 to 100 employees. And that’s just a partial list.
The layoffs indicate that office space is going to empty, and it’s not clear that it will be easy to fill it, especially if it’s not in a “prime location” in Tel Aviv. Wix was already offering subleases for part of its new campus in Glilot a year ago. Nearby, financially troubled SolarEdge is expected to occupy its new campus in early 2025 and may do the same to cut costs. Amot is still working to fill most of its Holon campus tower, and its project in the Elef complex in Rishon Lezion is still in the planning stages, some six years after it won the land.
Ben Zvi Klein says: “You can’t paint everything in rosy tones. There is great uncertainty in everything related to the technology sector and the market is difficult, slow and a little more difficult, but it is not black. There is uncertainty, but the sector is not collapsing.” https://en.globes.co.il/en/ “The supply that has been built up in the last three or four years in the office sector across Israel is unprecedented, about double the need,” Shafran says. “Mainly in the east and south of Tel Aviv, things look different. In Petah Tikva, for example, today, spaces are rented below cost – and not only there. In these areas, more patience is needed.”
One of the keywords for these areas is the light rail. When the construction of the Purple and Green lines is completed, which will create a light rail network with the Red Line, which also serves the cities surrounding Tel Aviv, the demand map will probably change. “When the light rail starts operating as an integrated line transport network, we will be in a completely different world,” says Ben Zvi Klein. “Everything will be different, even employment areas like the Elef complex in Rishon Lezion, Herzliya Pituah and the Infinity complex in Ra’anana.”
Shafran believes that the development of the tech industry can also have an impact on cities surrounding Tel Aviv. « If high-tech develops again, it will have an impact on other financial and commercial companies, which will push them out of Tel Aviv’s office towers. The price levels set by high-tech will weigh on them and they will move to the surrounding areas. »
« Stock prices of income-generating real estate companies have fallen »
Since the start of the downturn in the office real estate sector in early 2023, the stock prices of income-generating real estate companies have suffered sharp declines, which have continued this year. Since the beginning of 2024, the Tel Aviv income-generating real estate index has fallen by 16%.
Shares of Amot Investments (TASE: AMOT), one of the partners in the ToHa2 project where the giant deal with Google was signed, rose about 5% after the report was released, but have since fallen 6%. Bayside (Gav-Yam) (TASE: GVYM), Amot’s partner in ToHa, has jumped 8% since the start of last week and has maintained its strength since then.
“The office world is going through a totally difficult time,” says Ben Zvi Klein, “but a difficult time is not necessarily a difficult or bad time for the industry.”
“We are at the lowest point in almost two years, but we will still see the recovery coming,” Shafran says with certainty, “especially when high-tech comes back to develop and grow, after the shutdown we have all experienced, in Israel and around the world.”
Published by Globes, Israeli business news – fr.globes.co.il – July 4, 2024.
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