Israeli privately-held tech companies raised $12 billion in the first half of 2021 with billions more raised on the capital markets. Much of this money is used to hire new employees and lease office space, preferably in central Tel Aviv, to house their growing work forces.
One outstanding example of this is the Israeli fintech company Rapyd, which raised $300 million at the start of the month at a company valuation of $8.75 billion, after raising $300 million in January. Rapyd is currently headquartered in the Azrieli Sarona tower but in April it announced together with Azrieli Group Ltd. (TASE: AZRG) that it has signed an agreement to lease 27,500 square meters in the Azrieli Center - 13,500 square meters in the triangular tower and 14,000 square meters in the 91-floor spiral tower, currently under construction and due for completion in 2026. 15 floors in total for an estimated payment of NIS 100 million for eight floors in the triangular tower over five years and NIS 150 million for seven floors in the spiral tower over five years.
Commercial real estate broker Daniel Shamia, partner and owner of Next Place, which specializes in finding office space for Israeli tech companies, said, "The most in demand space by Israeli startup companies is the area around the Hashalom railway station by the Azrieli Center. The most in-demand tower is the Azrieli Sarona tower where Amazon and Facebook have their offices. What happens there is that the moment a company leaves there is a vacuum sucked up by the rest of the companies occupying the building. They have first rights. The price is NIS 160 per square meter."
"The second most popular are the Ha'arba'ah Towers, which are in-demand because of the location and the balconies - which they love in high-tech. The outstanding tenants in these buildings are Melio, which is in the penthouse, Armis and Rafael."
Shamia explains that the growing demand for office space in Tel Aviv is in order to attract the most talented employees. "When my customers complain that the price is too high, I ask them how much three good programmers cost them. When they tell me that each one costs NIS 50,000 per month, I explain to them that these three employees will influence 100 that will get a crazy salary, signing-on agreements, share options. The money is flooding in there. So why is it a big deal to lease an office for NIS 150,000 a month? It's small change."
"You can find things much cheaper seven kilometers from Tel Aviv"
Veteran real estate player Jackie Mokmal says that the real estate reality has changed recently. "We see the founding of dozens of startups with the ability to raise surprising amounts of money. These companies are still not yet profitable so they are going to locations that they can leave easily. This has strengthened the co-working trend. Our partners today are thirtysomethings who want Tel Aviv and Central Tel Aviv. They don't compromise over locations and they want commercial, entertainment and community services to be close by. They want to enjoy life. They don't want to go to a place where the rent is cheaper - it doesn't interest them.
"If you look at the map of Gush Dan (Tel Aviv Metropolitan Area), you'll see that seven kilometers from Tel Aviv, in Bnei Brak or in Holon you can lease offices 60% more cheaply. Not many want to go there."
"In order to integrate teams, they have to sit near each other"
"In Israel people look to be together and that's especially relevant in a situation of major growth, said Orca Security founder Geron. The company, which was founded in 2019, and is developing a cloud security solution, has offices in Israel, Los Angeles, London, Vienna and elsewhere but most of the development is conducted in Israel.
Over the past six months, the company's work force has grown from 50 to 150. Orca Security currently has 700 square meter offices in Tel Aviv's Hamasger Street and it will soon move to a 2,000 square meter office nearby, paying NIS 130 per square meter. Geron explains the growth in demand for office space in Israel as being due to large growth which requires direct face-to-face communication. "In the US people don't want to go back to the office. From their point of view the age of 90 minute commutes in each direction is over. In Israel people look to be together and it's especially relevant in a situation of rapid growth.
"In order to integrate a team, they have to sit near each other and they need someone to ask questions and someone to speak to. I think that because of the nature of the work in Israel, which is mainly development, people are looking to work in an office, but not fully. Most employees today ask to work in a hybrid style."
"The office is an instrument for strengthening enterprise culture"
Guardicore is developing a solution to protect the servers of the world's large corporations against attacks. VP human resources Ilan Stern said that the company is growing rapidly and today has 280 employees including 160 in Israel. Estimates are that by the end of the year, Guardicore will have 350 employees. The company recently moved from its 1,500 square meter office in the Levinstein Tower on Menachem Begin Road to a 3,000 square meter office in Beit Rubinstein, 400 meters to the north.
Stern recalled, "When we began to look, there was coronavirus hovering in the background. We were hesitating whether to keep the same amount of space or move to a hybrid working culture, in other words with some coming and some not, and not everybody having their own space, but we decided that we don't want that model because it is important for the company to continue to convey our enterprise culture. From our point of view, the office is an instrument for strengthening the enterprise culture. So we took a much larger space than we actually need today."
"This is space that will be enough for us for years to come. A large amount of the space we have allocated for public areas that will connect employees together. We have a large canteen that will let large groups eat lunch and there is a bar for the afternoon and evening and a recreational area with a billiards table and sofas and there is an assembly area to bring everybody together for the latest updates. Out of the 3,000 square meters, 700 square meters is devoted to these public spaces."
Stern believes that Covid has changed work culture. "I'm not sure we'll ever be able to turn the clock back. We are a company that worked five days a week in the office and it was rare that somebody chose to work from home. That won't come back. We allow a hybrid work model today according to which all employees can work two days a week from home. Our aim is to build in this specific office with its large public spaces something that will make people want to come to the office and be together. Not because somebody makes them but because they enjoy being together."
Stern explains that the choice to remain in central Tel Aviv was natural. "A large part of our work force is of people who live in Tel Aviv. There are many people who get to the office on electric scooters and bikes and ultimately the decision was to make it easier for them to get here. There is something here that is connected to the company's culture. When we understood that the previous offices were too small we began looking in the area. We checked out Yigal Alon Street, but we found that it was clear to us that we wanted a sea view, as in the previous offices. At some stage that began to define our search. We want a spacious office, with three adjoining floors and room to grow and a view of the sea."
"Prepared to pay more for flexibility
Seebo is developing technology to predict and prevent production and quality problems in manufacturing plants. The number of employees at the startup has doubled to 70. Seebo has a 300 square meter office in Tel Aviv's Montefiore quarter and is moving to a 1,000 square meter office.
Seebo CEO Lior Akiva said, "Most of our employees come by bike, scooter or walk. But there are also employees who come from outside of the city. Our preferred location is Tel Aviv. Like everyone, we are seeking the right balance in hybrid working."
Working from home saves the jams and is a better work-life balance and more time with the family and that's wonderful. But work from the office is also important because it allows better cooperation between team members, encourages creativity, informal conversations, as well as fun social connections. When thinking about work spaces, the acute need in a startup like ours is flexibility."
Akiva added that Covid has indirectly caused a change in the design of work areas. "Before Covid people came to the office five days a week and sometimes worked on their own and sometimes as part of a team. We've noticed that people who work from home concentrate on their team work on the days that they come into the office, In this situation, we need more meeting rooms compared with what was before Covid. If we once thought about a certain number of personal work stations and meeting rooms, so now we understand we have to reduce personal work stations and have more meeting rooms."
Akiva stressed that there are three factors making it difficult for companies to forecast the size of the work areas that they need. "We are a fast growing company and it is difficult to know how many people will be here in two or three years' time. The second thing is that it is not clear where hybrid working is going to - most people come to the office two or three times a week. The third factor is the virus itself - nobody knows what will be."
"The mixture of a fast growing company, hybrid work patterns and Covid, which comes and goes, creates a major difficulty for us in seeing how many square meters we will need in the near future. And so we are ready to pay more for flexibility. In other words, if we suddenly need to double the company's workforce, we will be able to cope with that."
Major recent deals
Threat detection solutions company Claroty has leased two floors - the 10th and 11th floors of Suzuki Tower at 7 Totzeret Haaretz Street , with 1,166 square meters on each floor, for NIS 145 per square meter. Other startups in the building include Hailo, which has two floors, Taptica has one floor and Tryeye is in advanced talks to lease the first and second floors.
Accounting software company Tipalti has leased an 7,000 square meter, six-floor building entire building from Acro Real Estate including a rooftop for events. The building is part of the Golf complex being built in Tel Aviv's Neot Afeka.
E-commerce fraud prevention company Riskified has leased all 7,200 square meters of Europa House in Shaul Hamelekh Boulevard in Tel Aviv for NIS 12 million a year for 10 years with an option for an additional five years.
Average price per square meter of Tel Aviv office space
NIS 94 in the second half of 2018
NIS 101 in the second quarter of 2021
Source: CBRE
Published by Globes, Israel business news - en.globes.co.il - on August 15, 2021
© Copyright of Globes Publisher Itonut (1983) Ltd. 2021