Tech deals revive Tel Aviv's office market

Construction of ToHa 2 tower in Tel Aviv credit: Tali Bogdanovsky
Construction of ToHa 2 tower in Tel Aviv credit: Tali Bogdanovsky

Three major leases signed last week by tech companies for office towers have boosted the Tel Aviv market, but surrounding cities are struggling to attract tenants.

Recent times have not been the best for Israel office real estate sector. The slowdown in the tech industry in Israel and worldwide, the rise in interest rates, the political instability in Israel and of course the war have all contributed to a major slowdown, especially after the boom in 2021 and 2022. Market studies have shown a significant fall in rental prices per square meter, and even a certain decline in occupancy, which Israel's office market has not seen for a long time.

It seemed that the slowdown was continuing, until within a week three big deals were concluded, thus shuffling the deck. Google leased 20 floors in the ToHa2 tower in Tel Aviv for NIS 155 million annually, while Palo Alto Networks, as revealed by "Globes" is significantly expands the number of floors it leases in the Alon 1 tower in Yigal Alon Street, and after 30 years in Herzliya, the Pitango venture capital firm is moving to Tel Aviv's new Landmark tower. Perhaps we were too quick to eulogize the Tel Aviv office market.

"The center of Tel Aviv is behaving differently"

There is no doubt that the real estate industry for offices is in a global slowdown, mainly due to the slowdown in the tech industry. Two years ago there were record deals for NIS 200 per square meter in central Tel Aviv. According to the report of commercial real estate specialists Newmark Natam for the second half of 2023, rents for offices in one of the hottest areas at that time, Yigal Alon Street in Tel Aviv, dropped by 27% within 18 months.

The latest three deals reported could be a turning point. The three deals reflect NIS 130-150 per square meter per month. These are substantial declines from the previously mentioned peaks, but real estate professionals do not see this as a sign of a crisis, but rather a return to sanity.

Newmark Natam VP Or Ben Zvi Klein says, "The records recorded two years ago are the exceptions, and that's how it should be treated. The prices of the latest deals are good market prices, which do not indicate a crash. These are minor changes and adjustments to the market situation, nothing more."

Is this a trend that demonstrates the recovery of the entire market? "There has been more traffic recently," says Ben Zvi Klein, "but companies are taking more time than before to choose the tower and the area. They are taking advantage of the opening of new projects in convenient locations, and they have an alternative to the office where they have been for years, which did not exist until now. A good for the resilience of the industry is also reflected in subleases (a tenant who rents out the space they rented to another company). They are not long-term, but for two or three years. This indicates that the companies assume that they will need the space again soon."

Real estate consultant Itai Shafran and a partner in Economic Planning solutions says, "In the office sector in Israel, you always have to divide things into two - the State of Tel Aviv and the rest. There are quite a few places that face stagnation, but in Tel Aviv this does not necessarily happen. The city center is the heart of the office sector in Israel, and it functions differently. Tel Aviv will continue to be the most sought after, and a center of attraction mainly for the tech industry, and as long as this sector continues to recover, we will see more deals like this."

What about cities surrounding Tel Aviv

Beyond the big deals in the center of Tel Aviv, the reality in the cities surrounding the business capital is not the same. Cities such as Petah Tikva, Rishon Lezion, Holon, Bat Yam and Bnei Brak, and even the more remote areas in Tel Aviv itself (beyond the distance of half a scooter battery in the language of real estate professionals), face weaker demand, and this despite the fact that the office space in them continues to grow.

What's more just this month expected layoffs of hundreds of tech employees was announced including Pagaya, which leases about 2,500 square meters of space in the Sarona Towers in Tel Aviv, and is laying off about 100 employees, fintech unicorn Rapyd, which leases about 11,000 square meters in the Azrieli Towers, is laying off about 30 employees, the Moovit app located in Ness Ziona is laying off about 25 employees, and international company Chegg is closing its development center in Rehovot laying off 80-100 employees. And this is just a partial list.

Such layoffs indicate the expected emptying of office space, and it is not clear how easy it will be to fill, certainly those that are not in a "prime location" in Tel Aviv. Already a year ago, Wix offered sublets for part of its new campus in Glilot. Not far away, SolarEdge, which is coping with financial troubles, is supposed to occupy its new campus in early 2025 and may do the same to cut costs. Amot is still working to occupy most of its Holon campus tower, and its project in the Elef complex in Rishon Lezion is still in planning, about six years after it won the land.

Ben Zvi Klein says, "It's not possible to paint everything pink. There is big uncertainty in everything related to the tech sector and the market is challenging, slow and a little bit more difficult but it is not black. There is uncertainty but the sector is not falling apart." "The supply that has been built in the last three or four years in the field of offices throughout Israel is unprecedented, about double the need," says Shafran, "Mainly to the east and south of Tel Aviv, things look different. In Petah Tikva, for example, today spaces are rented below cost prices - and not only there. In these areas, more patience is needed."

One of the key words for those areas is light rail. When construction of the Purple and Green Lines is completed, which will create a light rail network with the Red Line, which also reaches the cities surrounding Tel Aviv, the map for demand will probably change. "When the light rail begins to operate as a transport network of integrated lines, we will be in a completely different world," says Ben Zvi Klein. "Everything will look different, even employment areas such as the Elef complex in Rishon Lezion, Herzliya Pituah and the Infinity complex in Ra'anana."

Shafran claims that the development of the tech industry can also have an effect on the cities surrounding Tel Aviv. "If high-tech grows again, it will have an effect on other financial and business companies that will cause them to leave the office towers in Tel Aviv. The price levels set by high-tech will weigh on them and they will go to surrounding areas."

"Income producing real estate companies share prices pushed down"

Since the slowdown in the office real estate sector began, in early 2023, share prices of income producing real estate companies have suffered sharp declines, which have continued this year. Since the of 2024, the Tel Aviv income producing real estate index has fallen16%.

The share price of Amot Investments (TASE: AMOT), one of the partners in the ToHa2 project where the giant deal with Google was signed, rose by about 5% after the report but has since fallen by 6%. Bayside (Gav-Yam) (TASE: GVYM), Amot's partner in ToHa, jumped 8% since the beginning of last week and has maintained its strength ever since.

"The world of offices is in a completely challenging time," says Ben Zvi Klein, "but a challenging time is not necessarily a difficult or bad time for the industry."

"We've been at the bottom for almost two years, but we'll still see the rise coming," Shafran says with certainty, "especially when high-tech returns to develop and grow, after the halt we've all experienced, in Israel and in the world."

Published by Globes, Israel business news - - on July 4, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Construction of ToHa 2 tower in Tel Aviv credit: Tali Bogdanovsky
Construction of ToHa 2 tower in Tel Aviv credit: Tali Bogdanovsky
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018