2024-03-01 10:01:00
The office market is losing ground. It started a year and a half ago in small, non-prestigious offices and it spread with the increase in interest rates to all places. It is difficult to identify this from the reports of the major companies – they continue to assert strongly that the prices in the demand area in central Tel Aviv are stable, but they also admit that in other areas there are price drops and many vacant spaces.
But in practice, the declines reached everywhere, only that their intensity is different from place to place. Just before referring to the specific locations, it is important to understand the important phenomenon that has occurred in recent years – while in the past the office market was not accessible to private investors, in the last decade a sales method has developed for private investors who purchase small offices. The developer divides the floors into relatively small parts and sells each floor to a number of private investors and not to a large company or business. In this way, he receives a higher amount because the price per square meter in small transactions is higher, and beyond that, he has a flood of transactions – the private investors internalized that this is an investment with a good return from the yield of the apartment market (but, as mentioned, there are also risks).
The investors’ dilemma
With this method, it is estimated that 30-40 thousand private investors entered the market (conservative estimate) and it should be remembered that the price per square meter of an office is often significantly lower than the price per square meter of an apartment. The investors invested a relatively low amount, received financing and generated a good return. However, there are several problems with this method – while rent from a residential apartment is exempt from tax, rent income from an office is subject to tax. There is also a higher purchase tax than on an apartment, and still given the double yield there was an influx of thousands of investors into the field.
These investors achieved a return of 8%-10% on the property and took financing (which was cheap) up to 70% of the value of the property (usually 50%) and thus generated a double-digit return. Now many of them are in the opposite situation – there is no tenant, the interest rate has gone up and there are ongoing property tax and maintenance expenses. The yield is negative, you have to take money out of your pocket. There are masses of such investors who are in such a situation. Some are waiting, some are lowering prices significantly, there are already places that let in a tenant for an extremely low amount, the main thing is that he pays the property tax and current expenses.
These investors are admittedly not homogenous, there are some among them who really don’t mind waiting without a tenant for six months or even a year, but there are some among them who are very stressed. They lower the rent and office prices. In addition to the private investors, there are large yielding real estate companies, which is their field of business, and then their behavior depends on the financial situation. Those who want to radiate power insist on the prices, but suffer from occupancy. The majority are already flexible on the price.
Of course, it also depends on who the property is rented to and on what contract. Long-term contracts are closed and large companies that benefited from demand for offices could close long-term contracts. This saves them now and we are talking about the real estate powers that are traded on the stock exchange – in many cases the automatic mechanism and the tenant’s inability to leave a contract that is being renewed, leads to the absurd – very high rent in existing contracts compared to significantly lower rent in new contracts.
Private investors do not have this privilege. They usually rent to a single tenant, usually small-medium and usually with a short rolling agreement – one year plus a year. These investors are in a big dilemma when meanwhile the value of their property is decreasing and it is a matter of significant decreases – offices, unlike apartment houses, are a risky investment, they can also lose 20% and 30%. True, they also have the chance of a high yield, but we already know that it goes together.
Investors who are leveraged start to worry, and try to sell the property, on the other hand, the demand for offices from investors is small. Almost everyone appreciates that before recovery comes there is still a long way to go.
Why are office prices falling?
A BizPortal check shows that transactions of offices in the recent period express a decrease of 10-15% in the last year. There are places with sharper drops. These declines are due For several reasons:
- Excess supply of offices
- Decrease in demand for offices
- The increase in interest rates
- Decrease in rent
Excess supply of offices – According to the estimates of experts in the field, there is a very large excess supply of over 100 thousand square meters in Tel Aviv and Ramat Gan and over 1 million square meters in the demand areas. There are office complexes in Petah Tikva, Rishon Lezion, Holon, Ramat Gan that were launched a year or a year and a half ago and their occupancy is around 40%. BSR in Petah Tikva, LYFE in Bnei Brak-Ramat Gan, the 1000 complex in Rishon Lezion with significantly lower occupancy rates than expected.
Beyond that, more offices are being built, which will add up to half a million square meters per year for the next 3-4 years. In the meantime, it seems that this construction will lead to many “white elephants”, properties in which billions have been invested that will not yield a return.
Decrease in demand – We are at war, after weakness in high-tech and the economy in general. and with uncertainty about the continuation. On the one hand, there is great concern, on the other hand, we have to remember that the Israeli economy is strong and there is talk of the return of high-tech deals and exits alongside IPOs following the surge in Nasdaq. This can certainly save the situation, we remind you that in the surge of 2020-2021 there were offices that were rented in the demand areas, Tel Center Aviv for NIS 200 per square meter – 2 times the prices a year ago (prices there have dropped back towards NIS 100 per square meter).
interest rate increase – The increase in interest rates will make financing more expensive and make it harder for investors. Now the interest rate is in a downward direction, so that from a factor that led to a drop in prices and a decrease in rent, this could be a factor that stops the drop and perhaps also encourages demand.
Decrease in rent – The decrease in rent is actually an expression of demand, supply and the market situation in general. The decrease in rent is equivalent to the decrease in apartment prices. The rent has decreased by 15%, which means that the price has also decreased in this area.
price drops; In some places it is already a parachute
The decrease in rent is surprising in its strength. from checking BizPortal It turns out that bThe level of the soldier You will find offices for less than NIS 70 per square meter, a decrease of about 15% compared to the beginning of 2023. In the courthouse area in Tel Aviv the prices were about NIS 120 per square meter, you will now find them for NIS 100 per square meter. In the Menachem Begin area In the prestigious offices, the prices were NIS 170 and up. You will find for NIS 130-135 and there are also places for NIS 100. All this, by the way, without considering subleasing. Many hi-tech companies rent out excess space they have for dramatically lower amounts.
More examples – bYigal Allon The rent was between NIS 120 and 190 per square meter, now the rent is between NIS 100 and 125 per square meter.
if you pass to Ramat Gan-Bnei Brak (BBC complex) You will get reductions from NIS 77 per square meter to about NIS 65 per square meter. It is important to pay attention to comparing oranges with oranges. In those offices there is a very sharp drop in price, but this does not necessarily express the light. The Besar towers in the area are suffering from a significant drop in prices and rents also because there are new office buildings and there is a move to them. So the prices in the old ones are falling and in the new ones are higher and therefore the average is lying – it indicates a lower decrease than what actually happened in those buildings.
in the stock exchange complex In Ramat Gan, a similar picture – from an apartment rent of 110-115 at the beginning of last year, prices dropped to around NIS 100 per square meter. In the complex Besar in Petah Tikva You can now find offices for 45 NIS per square meter due to the plight of investors, a year ago it was 60-65 NIS per square meter.
The rent determines the price of the property. It’s not an exact science, but to understand what the property’s value is for buying and selling in these places, capitalize by 7%. For example – how much does an office in the Stock Exchange area in Tel Aviv cost. As mentioned, the rent per square meter is approximately NIS 100, which means that the cost will be approximately NIS 17,000 per square meter. This is not an exact science, it is a scale, a kind of average. There are places which are considered more dangerous (second circle and periphery) where the yield is higher, and which places are perceived as safer and where the yield will be lower.
What will happen during the year?
The conclusion is clear – office rents and office prices have dropped dramatically – an average order of magnitude of about 15% from the beginning of 2023. There are places where the drop is more pronounced. Looking ahead, there is great doubt whether the trend will change. Supply meets low demand and there doesn’t seem to be any change on the horizon. In the meantime, it seems that those who will determine the direction of the market are the private investors – those thousands who entered when a significant part of them is losing patience. They are less able to attract without a tenant.
Beyond that, the same office buildings that were built and sold in small portions also to private investors suffer from a negative image in relation to buildings that were sold or rented to a number of prominent companies and businesses. As soon as it is a large amount of lessors, then the maintenance of the building is less good, and this is expressed in a greater erosion of value than the buildings that are owned by a limited number of lessors.
And this leads the landlords to greater concern about the future. In the coming year, private investors are expected to leave the market, new investors will probably enter, but the desire to sell will prevail over the desire to buy. This may lead to further declines. On the other hand, you also have to remember that the economy is growing, this growth is also expressed in the need for offices. It is true that at this point in time there are many more offices than required, also incidentally due to the fact that the companies that rented offices preferred to rent an area larger than required by about 15% and also because they expected growth. In practice, a large part of these high-tech companies are in stagnation, decline and downsizing, and thus it turns out that they have an area of 25%-30% which is unnecessary.
These surplus areas, along with the construction that increases the supply, will meet with natural demands as a result of the growth in the economy, and the faster the economy returns to significant growth, the more the decrease in office prices will balance out. when will it happen? No one can know, but when you look a year ahead you don’t see it on the horizon.
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