Housing prices are slowing down, apartment rental prices are rising, but in the background there is one phenomenon outside of this circle. If there is one place where you see a complete stop, a kind of stagnation in certain areas, it is in the field of offices. Construction in Israel does not stop despite the state of high-tech – companies build more and more towers and market office units with an area of hundreds and thousands of square meters two years ahead. The companies that buy or rent are not in a hurry. They study the market carefully and sometimes prefer to look for the opportunity elsewhere or work for an office with a high level of finish lower to save costs.
According to the data of the Central Bureau of Statistics, about 73% of the total area of construction starts is residential and another 27% is non-residential. If you take the non-residential construction data and divide them into parameters, 25.7% of them are for offices. That is, something like 7%-8% of the areas under construction are offices, or in other words – for every 13 apartments, one more office will be built in Israel. It seems a seemingly low figure, but given the situation it is high – it is not clear why Israel continues to build so many offices while the crisis is looming. The supply of offices is high, offices remain empty and office prices, including in the center, are starting to fall.
According to a report by the NEWMARK NATAM company, in the second half of 2022 the office market clearly shows a downward price correction, with an average correction of 3.35%. The areas outside of Tel Aviv actually show a slight price increase led by Rosh Ha’Ein and Herzliya Pituach.
The report also refers to the Tel Aviv area, where it was determined that the subletting phenomenon in this city prevented larger declines. Many high-tech companies that predicted growth made deals with significant areas and when interest and inflation rose and a slowdown occurred in the high-tech industry, many companies that did not grow and recruit employees as they predicted subleased the empty areas.
The cooldown in high-tech affected the office market of Tel Aviv, therefore price decreases were recorded in the Yigal Alon area and in the Menachem Begin area. At the end of 2021, Tel Aviv was characterized by high rental prices, but the hi-tech crisis and continued construction stopped the prices and even lowered them. The average price is NIS 120 per meter, and it decreased after it was NIS 141 per meter a year earlier. On the other hand, in Menachem Begin, prices rose to NIS 171 per meter, this due to the strong demand for offices in the heart of Tel Aviv. On the other hand, Tel Aviv recorded an increase in class B offices, where increases of 2% were recorded, mainly due to the high demand for lower class offices in order to save costs.
The question is what will happen between the years 2025-2026 when new office towers will be occupied in the city. Due to the lack of acknowledgments, many offices work for Herzliya Pituach, where the price is about 20% lower and stands at NIS 103 per square meter.
The appraisers mainly talk about a decrease in value, apart from areas of demand. Menachem Begin and the State Square are “special” areas where prices are expected to remain high. But in the periphery, for example, new office towers remain empty. There, even in the second circle, they hope for the recovery of high-tech. If this does not happen, it may appear that the supply exceeds the demand and prices fall further. At the moment, one thing is clear – the office market is at a standstill and prices have dropped by about 5%. The investors were stuck without tenants. They see the risk-free interest rate rising and ask themselves whether the investment was worthwhile. Instead of getting 4 percent in hand, they were left with 8 percent on the tree.
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