"It is difficult to make decisions in a situation of uncertainty. The average lease agreements in Israel in the office industry are for a period of three to five years, and the market is at the moment typically in a situation of avoiding long-term decisions that will affect business moves. Most companies try to keep what they have and extend it for short periods on one-year or two-year contracts - two years," says Guy Amosi, CEO Avison Young Israel, which provides consulting and management services in income-producing real estate.
He adds that the crisis in the office sector is influenced by both the global and local crises in which tech companies are cutting their workforces. Consequently offices are becoming available alongside new projects that are being built and occupied.
"Real estate at an excellent level"
In recent months startups and tech companies have significantly reduced their activities and space. How does that influence the office leasing market?
"In the current situation, we do not see dramatic moves by companies that want to improve their office space. Three years ago, companies wanted to improve the employee experience and upgraded to new offices. Today, this is a less common phenomenon and companies only move offices if they have to. The rest of the companies are in a situation of uncertainty due to the war".
Amosi spokes to "Globes" on Sunday last week. "We woke up this morning to a pre-emptive strike on Hezbollah, which wanted to fire thousands of missiles here. How do you make decisions in a situation like this? It's a continuous situation - from the judicial reform to the war - in which the market is waiting for developments, and nobody knows how to make a decision, especially tenants.
"In addition, it is difficult for developers - who have to construct new buildings and get building permits and have not started building - to make a decision."
Is there office space that remains empty?
""Five to six towers are currently under construction in Tel Aviv's business center. Mivne Real Estate is building in Solelim Street, the Blue Square building in Tozeret Haeretz Street, Amot and Bayside's ToHa2, Azrieli's spiral building and the Icon building by the Ramat Gan Diamond Exchange. I don't think these companies and developers thought they would get to this stage of construction and progress, and that the buildings wouldn't be full yet. They are far from complete, and are at the highest level in the world. They are built to LEED Platinum standards, this is an energy standard that basically says how economical, green and friendly the building is to its users.
"The real estate is of the highest level and in an excellent location - the issue is high-tech which is the main reason why there is currently empty space. It is the engine that carries along the entire economy. If the tech sector does not grow, the law firms do not grow and all the services associated with tech companies are reduced and thus surplus space is created.
"And after all this, the war will end one day and after that there will be a serious boom in companies. If you look at history you see that after a war came very good days for everyone, including the office industry."
Are there cancelations of contracts or people breaking them in the middle. Do you receive inquiries about this?
"We receive inquiries and deal a lot with sub-leasing. For example, there was a deal we did with sub-leasing for an international company, which three years ago leased all its offices, and now when it has reduced its space it has asked that we find a customer for sub-leasing. There is currently a lot of supply for sub-leasing in the best buildings in the heart of Israel in the business center of Tel Aviv of all kinds of sizes and levels of luxury that you want in the area of the Hashalom Interchange and nearby."
"Everything is ready with excellent finishing"
"Globes" recently reported on a lawsuit in which space in the Da Vinci Towers was leased for NIS 70 per square meter after it was previously leased for NIS 160 per square meter. Does this reflect the direction of rents now in offices in the heart of Tel Aviv?
"This price is very unusual. Prices have gone down, but they haven't gone down like this. The price for an envelope (no interior design) in new Triple A level buildings is about NIS 130 per square meter of envelope, and the investment to reach finishing level is another NIS 40 per square meter.
"The office market in Tel Aviv and in Israel in general consists of strong enterprises that own 70-80% of the real estate, companies such as Azrieli, Amot, Bayside, Mivne, Reit1 and the insurance companies. These are strong companies that are not that excited about a halt of one or two years. It is unpleasant, but they will not collapse. That is, large companies know that they are constructing a building and that the building will stand for a certain period is built into the business plan.
"On the other hand, there are purchasing groups and investors who bought an office to lease as an income producing asset, and wanted to make a return. They are much more sensitive to what is happening and the price in a situation where the office is not leased out, including costs such as property taxes, management fees and its mortgage, and this will lead to lower prices in these places, as they will try to rent at any price."
What is happening outside of Tel Aviv, in places like Kfar Saba and Rishon Lezion? Where do you identify difficulties?
"There are millions of square meters built and vacant. In Petah Tikva, for example, there are many projects and empty spaces. Both in the Bnei Brak area and in Naimi Park at Mesubbim Interchange - projects with thousands of square meters - are not yet occupied by tenants. BSR City in Petah Tikva is another example because it is a purchasing group, but this is also a project that has been around for two years and is only 30-40% occupied, and there is 120,000 square meters for rent.
"There are also buildings in Kfar Saba that are empty at the moment and are nearing the end of construction and have not yet been occupied. Amdocs built a crazy campus in Ra'anana and now it is laying off employees and vacating offices. Anyone who wants can close a 'sub-lease' and move to Amdocs' offices, in an 18 month old building, and everything is ready has an excellent finish."
Are there also opportunities?
"The flourishing sectors are the defense industries and AI for those who seek opportunities."
Published by Globes, Israel business news - en.globes.co.il - on September 3, 2024.
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