September 20, 2021

Tech companies taking over Tel Aviv office market

Globes, Arik Mirovsky, 20.09.2021

"The income producing property market in Tel Aviv continues to rise at a pace that we haven't previously known," said Cushman & Wakefield Israel (Inter Israel) co-managing partner Yoram Blumenthal. "Developers are asking prices of NIS 140 per square meter, NIS 150 or even more and that exceeds all forecasts that we had. Only in the two weeks before the start of the holidays did we feel some sort of respite."

Israel and the international income producing real estate market are currently trying to recover from the severe blow that the Covid pandemic inflicted. Most of Israel's income producing real estate market is still stagnating but Tel Aviv, where prices are rising swiftly, is a different story.

According to Cushman & Wakefield's survey for the first half of 2021, Tel Aviv led with leasing prices of NIS 107 per square meter per month on average, followed by Herzliya (NIS 92 per square meter), Ramat Gan (NIS 90 per square meter), and Ra'anana, Rehovot and Ness Ziona (NIS 72 per square meter).

Other real estate services companies like CBRE and Natam found slightly different prices but the same ranking with Tel Aviv far ahead of the field. Cushman & Wakefield's figure of NIS 107 per square meter per month for the first half of 2021 is just higher than NIS 106 in 2019 and NIS 98 in 2020 after the Covid pandemic struck. And it is now becoming clear that prices jumped sharply in Tel Aviv in the third quarter of 2021, which is about to end.

A good example of this comes from the Meuhedet Health Fund, which is interested in buying the WE building, located between the Ayalon Highway and Menachem Begin Road to the north of the Azrieli Center. The building with 13,000 square meters of space and 180 parking spaces is owned by the Weiss Pandom Group and is reportedly worth NIS 350 million without finishing. Translated into rental prices that would be about NIS 140 per square meter per month.

In this part of Tel Aviv, Blumenthal says, prices can be even higher in premium projects like Azrieli's new spiral tower, in which fintech company Rapyd leased 14,000 square meters for NIS 160 per square meter per month. Rapyd has also leased 11,000 square meters and a 2,400 square meter balcony in Azrieli's triangular tower for NIS 140 per square meter. These deals were done in the first half of 2021, paving the way for even higher prices in the present half of the year.

Blumenthal said, "I don't remember a situation in which the market fell by 10% in terms of prices and in occupancy of space and corrected the fall within less than two quarters, and all this in a very small area: Menachem Begin Road, Yigal Alon Street, Rothschild Boulevard and Shaul Hamelekh. It almost doesn't extend to the Ramat Gan Diamond Exchange area."

According to Cushman & Wakefield, deals involving 190,000 square meters of office space have been completed in 2021 so far. "That is 24% above the annual forecast that we conducted at the start of the year, and that was very optimistic, and we are only in September," said Blumenthal.

Another example of how the Tel Aviv office market (the boom does not include Ramat Hahayal) is flourishing is Africa-Israel and Melisron's Landmark project in Sarona, where 90% of the space in the new 40-floor project has already been leased.

Blumenthal observes that service providers like banks, insurance companies and law firms are moving to places a little further out, even if it is within Tel Aviv. Take for example Gornitzky & Co. law firm, which is moving to the Vitania Tower by the La Guardia Interchange and Shibolet is moving from Museum Tower to Hassan Arafe. Herzog Fox Neeman is moving from Asia House also to Hassan Arafe and Firon is moving to Yad Eliyahu. The big banks are moving to the Ha'elef project in Rishon Lezion and Lod and the trend began years ago when Mizrahi Tefahot moved to Ramat Gan.

He said, "What is happening now is that high tech, those organizations that for the first time we see hiring employees through TV ads, which raised fantastic amounts in the past year, are moving into this space being vacated by older organizations."

Blumenthal said that the companies replacing the banks, insurance companies and law firms are not global companies. "We are talking about unicorns, startups and many of them many have had IPOs on Nasdaq but their management is completely Israeli: SimilarWeb, ironSource, Riskified and a long list of companies. Google and Microsoft are not in this game and are not in a position to respond - they have been left in their wake. Companies like Amdocs, Microsoft, SAP and others have been left behind."

"These companies have raised lots of money and now they are hiring a lot of employees, and employees need to sit in an office and as well as needing to offer them the best salary, you also need to offer them the best office in the best location. And everything revolves around this small geographical area and that's where all the companies that have raised about $10 billion in the past five months have gone."

Beit Pelephone by Beit Havarod in Givatayim, which has 18,000 square meters of space, was leased to a startup after it failed to find space along the Menachem Begin Road area. Riskified leased all the space in Europa House that had previously housed the Raved Magriso Benkel law firm, which merged with Shiboleth and left for offices in Shaul Hamelekh Boulevard. monday.com has leased thousands of square meters in the Rubinstein twin towers in Hassan Arafe. Switchup, which leases office space in buildings and adapts them to customers' needs, has leased many premises recently, all in Tel Aviv.

Is this trend likely to persist and hasn't Covid persuaded companies to reduce office space so that employees can work more from home?

Blumenthal doesn't see it that way. "Real estate is about long term processes. It's about locating space, signing contracts and building. What has happened reminds me more of the stock market and in contrast to residential real estate, in which prices are rising worldwide, with offices Tel Aviv is unique and represents an outstanding marker.

"These companies understood before everyone else that working from home doesn't work. It can work for some days of the week but there has to be a situation in which all the company is together. Even if it only happens two or three days a week, you need space to hold all the company's employees under one roof at the same time. Everything we heard about the transition to working from home isn't happening. The first to identify this were actually the tech companies. Those continuing to work from home are mainly not the high-tech companies."

You cannot ignore the fact that the residential real estate market is also booming is there anything that connects the two markets, or is it just coincidence?

"I think that cheap money is what the two have in common. The housing market is booming because of cheap money, that is to say low interest rates and for high-tech when do you see the last time that a range of companies advertised to hire employees on TV? Usually TV is for advertising household goods, cleaning materials and toiletries and suddenly you see TV campaigns and billboards. In this world too, there is a lot of money, which is an outcome of the large public offerings."

Another thing they have in common is that Tel Aviv is opening up a large gap from the rest of the country

"The geographical area that we are talking about is very small and hardly spills over to the east side of the Aylaon and doesn't touch the satellite towns of Tel Aviv, not Ra'anana, and not Kfar Saba and also not Petah Tikva, and this is something very unusual."

Published by Globes, Israel business news - en.globes.co.il - on September 20, 2021