Global tech crisis hits Israel’s office market

A black cloud hangs over Israel’s office market, which is highly dependent on the tech sector, after tech giants like Microsoft, Google, Amazon, Meta and Intel have all announced planned cutbacks. There have been no layoffs from the tech giants in Israel yet but the local real estate office market is anxious.

Avison Young Israel – propertech CEO Guy Amosi said, “The overall global sentiment – economic and political – effects every sector of our lives. Global events from inflation to interest rate hikes and the war in Ukraine and energy crisis in Europe influence the entire world, and for sure the real estate world and office real estate.

“It causes a situation in which people sit on the fence. It becomes more difficult for them to take decisions in the current climate and creates a situation in which all deals are now halted, even those that were in the pipeline. We had two or three deals involving tens of thousands of square meters just recently in which the companies decided in the middle of proceedings ‘let’s stop for six months and we will see where things are going.’ In other words by the movement of the leaves, you can understand the direction of the wind: there is a halt, and the way to a price drop is not far, in my opinion.”

“We still see occupancy of more than 90% in the quality towers in Tel Aviv but there is undoubtedly a slowdown in demand for commercial real estate in recent months,” says realtor Osher Ossi who specializes in commercial real estate with an emphasis on high demand areas in Tel Aviv. “High-tech companies are mainly fed by investments and when the interest rate is high and inflation is high and there is a war an uncertainty on the markets, money stays in the hands of investors and doesn’t necessarily reach the high-tech companies – and that’s what creates, among other things, the slowdown.”

“If the situation continues, the funds in the high-tech companies will run out, and we can already see many of them starting to reduce expenses. The big question is whether the global economy will manage to recover before the high-tech companies spend all their reserves.”

Exceptional records from which we can only decline

Office prices in Israel have been high since before the volatility of the Covid pandemic. According to the data from business real estate services company Newmark Natam company, the average prices for office space in the first half of 2022 reached a new peak in Tel Aviv, following exceptional increases in 2021. Any decline now will bring the market back to the more normal prices.

Newmark Natam VP landlord services Or Ben Zvi Klein says, “The first half of 2022 was exceptional and basically represents, in some areas, an increase in prices in commercial real estate that was even higher than the price rises in the housing sector, both in buying and renting. In recent months, a change in the interest rate and inflation environment has also already been felt in the office market. The sector has so far not been damaged as much as other industries, but even in it we see high-tech companies that raise less money than before, and refrain from renting very large spaces. Another effect on the market is a reduction in the volume of deals, due to high interest rates.”

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Amosi says of the new situation, “Suddenly there are thousands of square meters of vacant office space in Tel Aviv. Companies are subleasing areas in towers by the Ramat Gan Diamond Exchange, entire floors in the Vitania tower in Tel Aviv are already subleased, and individual buildings in Tel Aviv, with 2,000 and 3,000 square meters, are mostly empty. The companies rented offices at high prices, and now want to reduce the damage, so they don’t mind renting the spaces for NIS 10-15 per meter less, just to show that they have reduced the damage. The market is currently in a crazy imbalance, which will surely close over time – but right now we have a gap that cannot be bridged, between sellers and renters and buyers and renters. In my opinion, over a range of 12 to 50 months from now, we will see a lot of office space here that will be offered for rent.”

Maniv Real Estate Consulting CEO Jacky Mukmel adds, “We will go through a difficult period of about a year, I estimate – a period of reorganization, thinking, about where and what to spend the money on. It is true that the coffers of the high-tech companies are full, but there will be a certain evaluation of the situation. Until today, companies would rent 20% excess space, for the benefit of future development, and they will surely ask themselves now if that is right or wrong to do, and if they need it or not.

“All along I have said that although the rent does not have much weight in budgetary terms for the big high-tech companies, for earlier stage companies, who go to Tel Aviv just to feel that they are in Tel Aviv, NIS 300 per square meter is something that they cannot really afford. Expenses on such a scale, just for office space, will simply hit them in the end. This is what is happening now.”

Adapting to realistic prices but not a landslide

A certain decline from the peak to a relatively more “sane” price level – which according to our indications is already happening in various places – will undoubtedly be painful for some companies, but this does not necessarily mean that we are on the way to a freefall.

Mukmel stresses, “There is no landslide in the office market, and I don’t think there will be either. The market is assessing the situation, and perhaps a degree of sluggishness, imposed on it by the global economic situation. It is true, there is already a 10% or 15% drop in some places, but this is a realistic price adjustment and not a landslide. As soon as the demand in Tel Aviv decreases a little, among other things because companies have realized that money has become very expensive, the trend has changed and the entrepreneurs, who lived in euphoria over the past year, will now have to come back down to earth.

“There are also certain areas, for example south of Tel Aviv – in Rishon Lezion, Holon and Bat Yam – where there is construction on a huge scale, and the entrepreneurs will have to adjust themselves to the prices, and align the numbers to attract new customers. On the other hand, places like Bnei Brak and Petah Tikva are currently enjoying, in my opinion, positive signs. These are places where we will see a reduction in the price differences from Tel Aviv. The price adjustment process that the market is going through now will bring some relief to these areas, and in general will balance out rental prices, throughout the country.”

Ben Zvi Klein observes, “If forecasts on the rise in interest rates are right, the market will only make a slight correction in prices. As long as interest rates don’t exceed 4%, as the Bank of Israel estimates, and by the end of 2023 the increase in rates stops – the office sector, which has proven its resilience in coping with the effects of Covid, and so far also in coping with rate increases, will not be significantly damaged.”

But Amosi sees things differently, especially because of the hundreds of thousands of square meters of office space planned to be added in Tel Aviv alone in the coming years. “The entrepreneurs who are building office towers today, like Melisron in the Landmark project, are not worried – they have already signed lease agreements for most of the space,” he says. “But developers of towers where large spaces have not yet been leased should certainly be worried. There are many question marks and you never know where the market will be when these towers start to be occupied.”

Market correction? After the holidays, is already here

In conversations with professionals supporting office real estate, the question (and perhaps the hope) came up more than once, that perhaps what we are experiencing now is not even a market correction – but a temporary halt due to the summer vacation and religious holidays. It is possible, they say, that the period “after the holidays” that has now arrived will herald a recovery and once again bring about a change in the trend, this time upwards.

Ossi speculates, “We are in an important period that will be a test for the market, and will provide us with the answer to the big question: is the slowdown a real and actual slowdown, or a seasonal slowdown as has happened many times in previous years. You can already see that this is a sophisticated and controlled slowdown, as the high-tech companies are spending less and managing their money more prudently, so that they can cope and hang on for as long as possible. For me, my eyes are on the US economy, because there is talk of a slowdown next year as well – but in the short term, here in Israel, we would like to see a jump in demand. We have to wait and see if it will actually happen.”

Mukmel says, “If you look at global high-tech, Israel, I am happy to say, is in excellent condition. It is the center of global high-tech development. We will certainly see layoffs here and there, but we will not see what is happening in the US, Europe or elsewhere. Nothing dramatic will happen in Israel’s high-tech industry.”

Despite the uncertain situation, intriguing deals are still being put together in the tech sector – Google Israel is in advanced talks to lease about 20 floors in the new ToHa 2 Tower 2, under construction on Yigal Alon Street, at the corner of Totzeret Ha’aretz Street (the acronym ToHa) in Tel Aviv – about a third of the entire tower – for about NIS 90 million per year. “Globes” last week revealed that the agreement is for roughly 50,000 square meters at a price of NIS 150 per square meter in shell condition. The tower is a joint development by Amot Investments Ltd. (TASE:AMOT) and Bayside Land Corp. Ltd. (Gav Yam) (TASE:BYSD1) at an investment of NIS 3 billion. So far, the underground part of the tower has been built and construction is expected to be completed only in 2026. But the memorandum of understanding between Google and the developers is due to be signed in the coming days.

Amosi concludes, “The best advice right now is to sit and wait. Every Monday I talk to all the real estate advisors in Europe, and every Thursday with the real estate advisors in North America. The picture that emerges from my recent meetings with them is that we are part of the global situation and in New York the situation is no different, and in London the situation is even worse. In any case, the pace of decision-making is much slower today, and I think it is right to pause a little now, see what is happening in the market and only then act.”

Published by Globes, Israel business news – en.globes.co.il – on October 31, 2022.

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