Office rents rose by a record 28% in Tel Aviv last year. The rise came mostly in the second half of the year, sending office rents in the city to an all-time high, international real estate management and consultancy company CBRE reports. Rents rose steeply in the neighboring cities of Herzliya and Ramat Gan as well, while cities further removed from the center were left behind.
The coronavirus pandemic, and the large amounts of money raised by technology companies, contributed a great deal to the concentration of activity in the Israeli office market in the center of the country, and to the increase in the price gap between Tel Aviv and other places. In the final quarter of 2021, the average office rent in Tel Aviv reached NIS 122 per square meter monthly, 28% higher than in the fourth quarter of 2020, and 13% higher than in the previous quarter. The trend stems from high demand for offices in Tel Aviv on the part of technology companies, particularly for offices in the Sarona area. This represents something of a turnaround in the Tel Aviv market, as until recently the most expensive part of the city for offices was Rothschild Boulevard.
"No longer," says Yaron Shachar, head of investment and research at CBRE Israel. "Sarona is the new Rothschild. There's plenty of demand for Rothschild, but there are no new towers there or new supply of space of the size required by the big companies. Even mid-size companies, that need 3,000-7,000 square meters, are today looking towards the future, and choosing places where they will have room to expand. So it can now be said that Sarona has taken over the leadership." The result is that the most expensive office tower in Tel Aviv, and in Israel, is now Azrieli Sarona, where rents can be as high as NIS 160 per square meter.
That is not the end, however. Probably the most expensive deal last year was by fintech company Rapyd, which leased 11,0000 square meters of office space and 2,500 square meters of garden balcony from Azrieli Group in the Azrieli Center Triangular Tower, and 14,000 square meters of office space in Azrieli's jewel in the crown - the Spiral Tower, which will be occupied in four years' time. The price in the deal in the Triangular Tower is NIS 140 per square meter, while in the Spiral Tower, where the deal also includes parking spaces, the price amounts to more than NIS 160 per square meter. Prices like that have never been seen here before.
The demand for office space in Tel Aviv has brought occupancy rates to 97%, the highest level in recent years. At the beginning of the coronavirus pandemic, occupancy rates fell to 92%.
Office rents also rose sharply in 2021 in Ramat Gan and Herzliya. In Herzliya, the rise was 13% over the year, and average office rents reached NIS 88 per square meter. In Ramat Gan, the rise was 10%, to an average of NIS 86 per square meter. It has once more been made apparent that in real estate in general, and in offices in particular, the term "increased supply" is not enough by itself to bring prices down, unless the places where supply has increased match the places where demand is concentrated. This is because demand for offices is discontinuous, even between places that are only a few kilometers apart.
An excellent example of this is Kirat Arye in Petah Tikva and the BBC site in Bnei Brak, which had hoped to attract renters from central Tel Aviv, but were disappointed. Office rents per square meter in Bnei Brak are 60% lower than down the road in Tel Aviv.
In the case of Kiryat Arye, prices are a little higher, but they fell 2% in 2021. Both cities can draw optimism from the Red Line of the light rail, planned to start operating by the end of this year, and expected to cause changes in the real estate market along its length.
"Prices in Ramat Gan rose substantially with the new projects, whereas in next door Bnei Brak prices are not rising, because supply there is very large. There is also apparently a psychological barrier preventing companies from moving there. Even though, as the crow flies, it's just a few kilometers from central Tel Aviv, we are not seeing technology companies going there," says Shachar.
Shachar believes that what happened in Tel Aviv in the dot.com bubble twenty years ago, when, after considerable inflation in office rents at the end of the 1990s and early 2000s, the bubble burst and prices fell by tens of percentage points, will not happen again anytime soon.
"The Tel Aviv office market at the beginning of the 2000s was pretty small," he says, "and not like the current market, which consists of 4.5 million square meters. Then, any small shift made a very big difference. Today, the market is not just made up of startups as it was then, but of very large, mature companies like Google and Amazon and Facebook, each of which occupies tens of thousands of square meters. They are here to stay, and you see them hiring workers. So the demand here is real, and not from some company that just made its IPO, and you don't know where it will be in another three years."
Published by Globes, Israel business news - en.globes.co.il - on January 11, 2022.
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