Flood of New Office Space Could Glut Tel Aviv Market, Analysts Say

Some 8,000 new office suites are slated to be built in and around Tel Aviv over the next few years, which could send rental rates tumbling.

Over the next three years, one million square meters of office space are expected to be added in the Tel Aviv area. All you have to do is look at the skyline to see some of the new construction. So how will all that space be filled?

The Azrieli Group is building 100,000 square meters of office space in a 50-story tower across from the Kirya defense compound, near several 19th-century buildings from the German Templer colony of Sarona.

Nearby, on Ha'arba'a Street, the Hagag Group is putting up two office buildings, one with 35 stories and a second with 38, with 90,000 square meters of floor space between them. These are just a few of the projects in Tel Aviv, and there are more in Bnai Brak as well.

The market for office space is currently stable in terms of occupancy rates and rent prices. But that could change with the addition of approximately 8,000 new office suites of around 120 square meters apiece to the mix. If the economy goes south in the next few years and unemployment increases or the technology sector slows down, it will be even harder to put tenants into all that office space. For now it appears that the developers who can put their offerings on the market first will benefit.

Some of the projects that are still in the blueprint stage could be scrapped due to financing problems or put on hold to wait out the glut of office space. Prices have already softened in what could herald trouble ahead. Some new office-space owners, anticipating a saturated market, have been trying to unload some of it.

"There is a lot of activity in the income-producing real estate market," a report by Natam Real Estate Services noted in a survey of office prices in the past half year. "Unlike 2011, when prices were high ... many investors and developers are interested in selling assets, which brings about a decline in prices."

The company says the glut could begin in 2014. VP Marketing Zohar Segal noted that some companies are moving their offices out of the center of the country, to where rents are cheaper.

In Haifa, for example, even after rising somewhat recently office space costs NIS 51 per square meter on average, just over half of the Tel Aviv average of NIS 96 per square meter. In Jerusalem the average is NIS 66 per square meter.