Israel's market for office space of 2005 in no way resembles the market in 1999, when high tech was flourishing. Many leases signed during the boom years, when demand for office space by high-tech companies was rising, are now terminating. The termination of leases provides an indication of the change in the office market, and is a basis for projections.
MAN Properties president and managing director Jacob Mukmel says, "Prices collapsed between 1999 and 2004, reaching up to 50% in some areas. Price plunged because many start-ups and established high-tech companies closed down when capital injections from investors dried up, and activities were moved to the Chinese and Indian markets, which began to develop in recent years."
"Globes": Was the decline in rents nationwide?
Mukmel: "If we define Tel Aviv and Herzliya as core demand areas, the effect in these areas was greatest, compared with outlying areas, which were less affected. Rent in demand areas was halved, but fell 25-30% in outlying areas. Companies facing cash flow problems sought alternatives, and the office market in outlying areas gave them concessions in local property taxes. Companies were welcomed with open arms, boosting demand in Jerusalem, Lod, Netanya, and Petah Tikva.
"Toward mid-2004, as the economy stabilized, we began to see signs of optimism and growth, boosting foreign investors' confidence, and halting the extreme fluctuations in rental prices that characterized the office market until recently. The market stabilized with a large surplus of office space, sufficient for two to three years.
"In 2004, many companies exploited the low prices to upgrade, moving to higher demand high-tech areas, such as Herzliya and Ra'anana. These companies exploited the fact that the local property taxes component in most areas improved, while rent was lower than ever, as well as the fact that new and modern buildings were standing empty. These upgrades boosted demand by 30%, which reduced tenants' bargaining power.
"Examples of a rapid rise in marketing can be seen in the Azorim Park in Petah Tikva, in a number of projects in Ra'anana, and in Bayside Land Corp.(Gav Yam) (TASE: BYSD1), Ackerstein Industries, and the North Star projects in Herzliya, which have received a major push."
What do you predict for the office market in the near future?
"These figures indicate that the office market faces a big question mark. Current rents are not high enough to finance and construct new office buildings, and the return on investment is frequently not worthwhile. I therefore believe that construction will continue to stagnate. A breakthrough will occur only if high-tech companies become cash-rich again, and investors return to Israel. Rent will not rise much over the next two years, but at least there will be a positive mood of upgrades and expansion, especially in demand areas."
Published by Globes [online], Israel business news - www.globes.co.il - on April 25, 2005