Tel Aviv office space market in deep crisis

Arik Mirovsky Until recently, companies waited in line to rent space in Tel Aviv and Ramat Gan’s office towers. Today, entire floors in towers such as the Azrieli Center and along Yigal Alon Street are abandoned, and a “Globes” investigation found that there is almost no prestigious office tower in Tel Aviv where thousands of vacant square meters cannot be found. This contrasts with the situation two years ago, when occupancy rates reached 100%.

Research led by Geocartography’s Dr. Rina Degani among office tenants found that 80,000 square meters of office space in Tel Aviv and Ramat Gan’s towers remains empty. Former CEO of CBRE Israel Jacky Mukmel estimates that the real figure is at least five times higher. He said, “Between Netanya and Holon, I estimate that there is excess space being offered of 1.7 million square meters of which a quarter is in Tel Aviv’s towers.”

Office towers are an especially challenging real estate sector, which reflects the national economic situation, the global economic situation, and the tech situation. The office towers that are currently occupied were built by developers a decade ago, when demand was very high and supply was low.

At the end of the 1990s, Tel Aviv was hit by a wave of new towers, built following the economic boom of the first half of that decade. But by the time they were occupied, the world has entered the dot.com bubble crisis, which sharply reduced demand and forced developers to lower rents until the end of the first decade of the 2000s. Today the challenge facing the owners of these towers is the competition against much newer buildings.

A different type of challenge in this market in Israel is its lack of transparency, manipulations by developers and property owners including in the financial reports of public companies, including a culture of secrecy and a real difficulty in obtaining clear data. Unlike the housing sector, there is no objective body like the Central Bureau of Statistics that monitors its performance, with the exception of the IVS appraisers’ forum, which manages returns calculations. But this is not enough to characterize, map and analyze the market.

A semi-competitive market

The study conducted by Geocartography focused on offices in Tel Aviv and Ramat Gan. It is clear from the study that the transition to working from home that began during the Covid pandemic has accelerated during the war. A survey conducted by “Globes” revealed that in the new and prestigious office towers in Tel Aviv and Ramat Gan, there is over 15% excess space, occupied offices are half empty give the feeling that they are in the process of being abandoned. They are closed some days of the week due to working from home, and the number of employees there is very small.

In most cases, companies have not returned surplus areas to the property owners, since they are obliged to rent until the end of the lease. Many companies try to sublet while others simply abandon offices they have leased, or expand existing work spaces per employee. These two phenomena help maintain an outward appearance of business as usual.

But they are not normal. Newmark Natam VP real estate services Or Ben Zvi Klein says, “One of our problems in measuring rents in Tel Aviv is subletting, since it is a deal between the main tenant of the space and another tenant, while the owners of the space continue to receive the same price they signed in the contract.”

The company’s previous data show that office prices in the city have fallen back about two years, to an average level of NIS 140-150 per square meter in new towers in central Tel Aviv.

“Prices are falling throughout Gush Dan,” says Mukmel. “The rent for space is set in negotiations between the tenant and the property owner and is kept secret, and unlike in the past there is no floor to prices. If you are a good tenant just sign and enter. The developers, of course, don’t want to report on the situation because it conveys weakness and weakness directly alarms the banks and also bothers negotiations with tenants for additional space.”

Rents are plunging

This pushes the market semi-underground, but “Globes” investigation found interesting office properties, at prices that until recently were hard to find.

Take the Azrieli towers for example where thousands of square meters are offered for rent, at NIS 110-150 per square meter. In boutique buildings on Rothschild Boulevard, rents of NIS 100-125 per square meter are being asked, including in buildings slated for preservation. Thousands of square meters of offices in the area of Ha’araba’ah Street and Sarona are being offered for rent for about NIS 140 per square meter. Further north in Tel Aviv, space in the Midtown, We, Kardan towers is available for NIS 120-150 per square meter. In Alon Towers space costs about NIS 130 per square meter. The most expensive offices space to rent is in the Azrieli Sarona, Landmark and TOHA towers, where rents can reach NIS 180 per square meter. “You won’t find prices of more than NIS 200 per square meter now, as was the peak two years ago.” Mukmel says.

In his estimation, rent reductions of up to 30% can be found in offices, especially in towers established by purchasing groups and space being sublet. This is reflected in differences of tens of percent in asking prices for space in those towers.

When it comes to office towers from the previous wave of construction in the 1990s, such as Rubinstein, Levinstein, and Sonol on Begin Street, asking prices reach about NIS 120 per square meter, in older buildings like Amot Hamishpat Tower and Millennium Tower rents don’t reach NIS 100 per square meter, while in Ramat Ha’hayal, well away from the center in northeast Tel Aviv, rents are NIS 70 per square meter.

This is not a comprehensive rent survey, nor one based on closed deals, but on rents being asked for. But it is clear that the final rents in the assets surveyed in the sample could fall to lower levels, or as Mukmel puts it, “Whoever wants NIS 130 per square meter, will also compromise on NIS 100.”

The highlight is in the Landmark Tower in Sarona. Meta will move there from its current location in the Azrieli Sarona Tower, but has decided to forego seven of the 20 floors it rented from the tower’s owners Melisron and AFI Properties, which it will sublease. Estimates are that the rents offered to Meta’s subtenants are at least 10% lower than the rent it pays to Azrieli (about NIS 160 per square meter).

Half a million square meters on the way

What characterizes demand for offices in Tel Aviv? Geocartography found that most of the demand for offices is from small businesses. Almost 50% of offices in Tel Aviv and Ramat Gan only have up to ten employees and another 25% have 11-30 employees; 55% of offices in Tel Aviv and Ramat Gan have space of up to 150 square meters, and 28% have space of 150-500 square meters.

Geocartography found that the cost of maintaining a 150 square meters in Tel Aviv, with rent and municipal taxes, totals NIS 26,000 per month, in Ramat Gan NIS 21,400 per month, and in Bnei Brak NIS 15,000 per month, not including parking spaces and management fees.

While demand for office space is falling, supply is increasing. In the last 5 years, about 1.5 million square meters of office space has been built in the Tel Aviv district, in dozens of towers. Degani says, “The main difficulty will be the large supply of offices under construction due to be completed in the next two or three years.”

During this period, construction will be completed of 500,000 square meters of office space in the Tel Aviv region. Degani estimates that even in a difficult market situation there will be demand for at least 160,000 square meters in the next two years, as part of natural demand processes of increases needs, with owners of 340,000 square meters of space having difficulty finding tenants.

The situation is much worse in office buildings outside Tel Aviv. The Elef development in Rishon LeZion, for example, is touted by many as “the next big thing.” However, Klein Ben Zvi says, “It is a development that is still in the making and has thousands of square meters available, and this at a time when they were already hoping that it would be occupied at a similar level to parallel developments.”

The question is how long the current office tower crisis will last. The dot.com bubble affected office prices in Tel Aviv for about eight years. The current crisis is more complex, as it includes new elements of hybrid work, the political and geopolitical situation, and the global economy.

Published by Globes, Israel business news – en.globes.co.il – on February 1, 2024.

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