A Tale of Two Israeli Cities, With Renovations and Missed Chances

Rising housing prices have sparked a construction boom, rescuing Tel Aviv from urban blight. Let's hope it happens in Haifa's lower city, too.

Everyone is waiting to see whether masses of protesters fill Tel Aviv's Rothschild Boulevard this year, too. But strolling down the boulevard and the nearby streets, one can't help but notice a socioeconomic phenomenon of an entirely different stripe.

It seems construction work is taking place on every other building and on every empty lot. On some sites we're talking about high-rise apartment buildings or huge, glittering office towers; elsewhere it's the renovation and preservation of old structures, newly beautiful in their fresh paint.

Where Rothschild and Allenby streets meet in Tel Aviv: A mix of the high-rise new and the preserved.
Aviad Bar Ness

For example, there's the corner of Ahad Ha'am and Balfour streets, where an old building is being expanded and renovated. Beneath it a huge pit is being dug for underground parking. In the end, as the sign promises, the project will turn an old, neglected three-story building into a renovated gem, with additional floors on top.

This is a holiday period when we should be thinking positively, and it's easy to think positively when considering Tel Aviv's urban renewal.

Unfortunately, for decades a process familiar elsewhere in the world has been taking place in Israel, too. City centers have deteriorated and lost their residents as well as their fabric.

The desire to move from old and crowded apartments to more spacious and modern housing in outlying neighborhoods and the suburbs, where it's more convenient to raise children, creates a clear social process. Young people gradually leave, city centers lose their affluent young population, public services deteriorate and building maintenance is neglected. It's a self-sustaining negative process. The abandonment leads to neglect, the neglect leads to abandonment.

That happened in Tel Aviv too. Over many years the city center was gradually abandoned, and apartments and whole apartment buildings were turned into offices and warehouses. For anyone who could afford it, the urban fabric moved north or outside the city.

Of course, that happened in Haifa and Jerusalem, too, not just in Tel Aviv.

Momentum for change

This is a long-term, self-perpetuating economic and social process, so it isn't easy to reverse. Municipalities all over the world are racking their brains in an attempt to reverse the decline of city centers.

In Israel, this is egregious waste. Israel is a small, crowded country that is only becoming more crowded. It's very hard to find available land for construction, and everyone rightly wants to preserve open green spaces. Meanwhile, thousands of old buildings stand in wretched condition in city centers, half empty or not used for housing. They're an eyesore.

The good news is that if for any reason the trend is reversed and renewal begins, that process is self-sustaining, too. The well-to-do move to the city center, creating momentum for change. That's what's been happening in Tel Aviv in recent years; the hammering on Rothschild Boulevard and nearby is a clear sign.

Of course, everything good has a downside. The construction momentum in the heart of Tel Aviv - which has positive economic implications for both the country and the municipality - couldn't have taken place without the price increases of recent years. So this process is strongly in evidence in Tel Aviv, but barely so in other city centers that have suffered similar declines.

The economy has its own, slow ways of restoring balance. Despite the waste and urban blight, an old and neglected building can stand deserted for years if the sale price after the investment in renovation doesn't generate a profit. But if the prices increase enough, the financial interest of the landlords and the developers who are pushing for renovation or construction will overcome any obstacle. That's what happening now.

On the other hand, if prices increase too much, no buyers will be found for these buildings, and the process will stop. In the end, things balance out, but slowly. In the case of construction and renovation in the city center, the problem becomes even more acute because the municipality wants, and rightly so, to preserve buildings of great architectural and historic value. That greatly increases construction costs.

It's much cheaper and easier to put up a new building on the ruins of an old one than to renovate an existing building. But a city has to preserve its past and character. That's in the public interest. The result is that without high sales prices there will be no renewal; there will be no preservation and renovation on the one hand, and no high-rise buildings on the other. As we've said, everything good has a downside.

Haifa's missed opportunity

This process is taking place now in Tel Aviv, both in the city center and in the more neglected south of the city. But we barely see it, for example, in Haifa's lower city, which could be an urban jewel. The reason is prices.

If real estate prices in Haifa increased significantly, it would be worth it to renovate the historic buildings in the lower city. At present, any brief tour of the area creates a sense of missed opportunity; the built-up area could look so much nicer.

So if you've been hoping for a sharp decline in housing prices, you should be careful about what you're wishing for. Below a certain price level, the momentum of urban construction and renewal that we're seeing in Tel Aviv will stop with a screech. In other places we won't even have a chance to begin.

The good news is that wherever resources have been wasted, there is room for improvement. The global economic outlook isn't bright these days, and that will affect us too. Momentum for urban renewal and massive rehabilitation of city centers could generate economic activity in Israel, which would compensate somewhat for the global slowdown.

In the past, global recessions actually benefited the Israeli construction market. When the situation around the world is tough, more Israelis return and fewer leave the country. There's also an increase in immigration. This process creates greater demand for housing.

The spring holidays are a good time to think about renewal. Let's hope the process we're seeing in Tel Aviv picks up speed and spreads. The decline and neglect of our city centers went on for decades - two generations. Renewal will also last many years. Someone walking slowly in the right direction will reach his destination faster than someone walking fast in the wrong direction.


The writer is the CEO of Psagot Compass Investments.