Israel's post-COVID Office Market Is Down, but Not Out

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People watching the sunset in Tel Aviv, Israel, April, 2021.
People watching the sunset in Tel Aviv, Israel, April, 2021.Credit: AP / Oded Balilty

The Israeli office market is in a period of post-coronavirus uncertainty, but for many companies the choice of renting or not renting office space is theoretical: They are for the time being tied to long-term rental contracts even if their actual needs for space have shrunk and may well shrink further as the work-from-home phenomenon takes hold.

Ori Halevy, an architect with the firm Auerback Halevy, is today engaged in projects to adapt office space to the post-COVID era, but he admitted that the emerging field is contending with uncertainty.

“Apart from design and planning adaptations, which are focusing on enhancing creativity and collaboration in open spaces, with the option of hot desks and modular functions for employees who come to the office only once every two weeks, we recognize that large organizations we work with managing risk,” he said.

“On the one hand, they are still keeping the office space they have. On the other, they are sub-letting some space,” he said, saying they are playing a waiting game until they see how the workplace environment is developing.

Jacky Mukmel, chairman of the commercial real estate advisory firm CBRE Israel, said the office market, for now, was feeling the pinch of the coronavirus but it hasn’t been decimated. That, he said, is mainly due to big companies, which continue renting workspace and offices. Smaller office renters have been hurt and won’t recover anytime soon, he said.

Jacky Mukmel, chairman of the commercial real estate advisory firm CBRE Israel.Credit: Morag Bitan

As a result, rentals in Tel Aviv, office rents have fallen about 8% and occupancy rates to 91%. Commercial rents have fallen 15%. In Ramat Gan, next door to Tel Aviv, office rents are down 6% and in Herzliya they are down about 8%, Mukmel estimated.

“That’s because smaller tenants have left. We don’t see them returning in the near term. Demand will come entirely from big companies,” he said.

Even before the pandemic created an upheaval in working patterns, the Israeli office market was suffering a glut. Today, planning authorities estimate the market is suffering from an excess supply of about 240,000 square meters of floor space approved for building between now and 2040.

The center of the country had seen a building boom of office towers that may never be fully populated. The brunt of the downturn will be felt by purchasing groups of small investors that buy and rent out small office spaces, rather than by big developers that build and rent office towers by the floor, Mukmel said.

Purchasing-group investors in many cases got into a segment of the office real estate market they didn’t fully understand.

“It’s a market characterized by big risk of oversupply because investors were piling into it without understanding the risk they were taking on,” he explained.

“Small-business owners don’t hesitate to move to a cheaper location, or rent in the periphery (outside greater Tel Aviv). ... It will take a long time before landlords will be able to base any business on them because their customers aren’t recovering from the pandemic so quickly,” he said.

Bigger companies on the other hand need to stay in the center of the country, where the most proficient workers live. “What interests them is how much space they can rent and where. The cost of rent for them is marginal for, say, high-tech companies,” Mukmel said.

Nevertheless, Mukmel said he remained optimistic about the office market.

“Tel Aviv currently has a forecast supply of five million square meters. The market won’t suddenly reawaken – it will take time,” he said, adding: “Anyone who planned to build a new office building in the past year froze the plans. I believe that in Tel Aviv the supply will be absorbed. In the periphery, the problem of oversupply may be more difficult. “

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