Recent times have not been the best for the office real estate sector in Israel. 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 significant slowdown, especially after the boom in 2021 and 2022. Market studies have shown a significant drop in rental prices per square meter, and even a certain drop in occupancy, something the office market in Israel has not seen for a long time.
The slowdown seemed to continue, until three major deals were struck in the space of a week, which shuffled the deck. Google leased 20 floors in Tel Aviv’s Toha 2 Tower for NIS 155 million a year, while Palo Alto Networks, as Globes reported, is significantly expanding its leasehold in the Alon 1 Tower on Yigal Allon Street, and after 30 years in Herzliya, the venture capital firm Pitango is moving into Tel Aviv’s new Landmark Tower. Perhaps we were too quick to praise Tel Aviv’s office market.
“Tel Aviv Center Acts Differently”
There is no doubt that the office real estate industry is experiencing a global slowdown, mainly due to the slowdown in the tech industry. Two years ago, there were record deals worth NIS 200 per square meter in central Tel Aviv. According to a report by commercial real estate specialists Newmark Natam for the second half of 2023, office rents in one of the hottest areas at the time, Yigal Allon Street in Tel Aviv, fell by 27% in 18 months.
The last three deals could mark a turning point. All three deals reflect NIS 130-150 per square meter per month. These are significant drops from the peak mentioned earlier, but real estate experts do not see this as a sign of a crisis, but rather a return to sanity.
“The records from two years ago are exceptions and should be treated as such,” says Ben-Zvi Klein, vice president of Newmark Natam. “The recent transaction prices are good market prices and do not indicate a collapse. These are just minor changes and adjustments to the market situation, nothing more.”
Is this a trend that indicates a full recovery in the market? Ben-Zvi Klein says: “There has been more movement recently, but companies are taking longer than before to choose a tower and an area. They are taking advantage of new projects opening in suitable locations, and they have an alternative to the offices they have been living in for years, which have not yet existed. The good resilience of the industry is also reflected in sub-leases (a tenant who rents the space it has rented to another company). They are not long-term, but for two or three years. This indicates that companies are assuming that they will need the space again soon.”
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“In the office sector in Israel, you always have to divide things into two parts – the Tel Aviv district and the rest of the regions,” says real estate consultant Itai Shafran, a partner at Economic Planning Solutions. “There are quite a few places that are facing recession, but in Tel Aviv that doesn’t necessarily happen. The city center is the heart of the office sector in Israel, and it works differently. Tel Aviv will remain the most sought-after, and a center of attraction primarily for the tech industry, and as long as this sector continues to recover, we will see more deals like this.”
What about the cities surrounding Tel Aviv?
Beyond the mega-deals in central Tel Aviv, the reality in the cities surrounding the commercial capital is not the same. Cities like Petah Tikva, Rishon LeZion, Holon, Bat Yam, Bnei Brak, and even the more remote areas of Tel Aviv itself (more than half a motorcycle battery away in real estate parlance) are facing weaker demand, despite the fact that office space there continues to grow.
In addition, this month, hundreds of expected layoffs in the tech sector were announced, including Pagaya, which rents about 2,500 square meters of space in Tel Aviv’s Sarona Towers, and is laying off about 100 employees; fintech company Rapyd, which rents about 11,000 square meters in the Azrieli Towers, and is laying off about 30 employees; Ness Ziona-based Moovit is laying off about 25 employees; and global company Chegg is closing its development center in Rehovot and laying off 80-100 employees. And that’s just a partial list.
Such layoffs point to a potential emptying of office space, and it’s not clear how easy it will be to fill it, especially if it’s not in a “premium location” in Tel Aviv. Already a year ago, WEX offered to lease part of its new campus in Glilot. Not far away, SolarEdge, which is dealing with financial problems, is due to occupy its new campus in early 2025 and may do the same to cut costs. Amot is still working on occupying most of its campus tower in Holon, and its project in the Elev complex in Rishon LeZion is still in the planning stages, some six years after it won the land.
“It’s not possible to paint everything rosy,” says Ben-Zvi Klein. “There is great uncertainty in everything related to the technology sector and the market is difficult, slow and a little more difficult but it’s not black. There is uncertainty but the sector is not collapsing.” https://en.globes.co.il/en/ “The supply that has been built in the last three or four years in the office sector throughout Israel is unprecedented, almost double the need,” says Shafran. “Especially to the east and south of Tel Aviv, things look different. In Petah Tikva, for example, spaces are being rented today at below cost prices – and not only there. In these areas, more patience is needed.”
One of the keywords for these areas is the light rail. When the Purple and Green Lines, which will form a light rail network with the Red Line, which also reaches the cities surrounding Tel Aviv, are completed, the demand map is likely to change. “When the light rail starts operating as a transportation network of integrated lines, we will be in a completely different world,” says Ben-Zvi Klein. “Everything will look different, even employment areas like the Elev complex in Rishon LeZion, Herzliya Pituach, and the Infinity complex in Ra’anana.”
Shafran argues that the development of the tech industry could also affect the cities surrounding Tel Aviv. “If high-tech returns to growth, it will affect other financial and commercial companies, which may push them out of Tel Aviv’s office towers. The price levels set by high-tech will weigh on them, and they will go to the surrounding areas.”
“Stock prices of income-producing real estate companies fell.”
Since the slowdown in the office real estate sector began in early 2023, the stock prices of income-producing real estate companies have suffered sharp declines, which have continued this year. Since 2024, the Tel Aviv income-producing real estate index has fallen by 16%.
Shares of Amot Investments (TASE: AMOT), one of the partners in the ToHa2 project where the mega deal with Google was struck, rose about 5% after the report but have since fallen 6%. Shares of Bayside (GAV-Yam) (TASE: GVYM), Amot’s partner in ToHa, have jumped 8% since the start of last week and have held strong ever since.
“The office world is going through a challenging time, but a tough time doesn’t necessarily mean a tough or bad time for the industry,” says Ben-Zvi Klein.
“We were at the bottom for about two years, but we will see the rise coming, especially when high-tech returns to development and growth, after the hiatus that we all experienced, in Israel and the world,” Shafran says confidently.
This article was published in Globes, Israeli Business News – en.globes.co.il – on July 4, 2024.
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