Tel Aviv, the business center of Israel, has been hit hard by the slowdown of the high-tech sector, which has been one of the main drivers of the office rental market in the city. According to two recent reports by real estate companies Natam and Inter Israel, the market is correcting downwards, with some areas experiencing significant price drops.
The reports attribute the decrease to the previous high level of demand and the surge in rental prices that reached over 200 NIS ($52) per square meter in some places. However, as the local high-tech sector faces challenges such as talent shortage, regulatory uncertainty, and global competition, many companies are downsizing their spaces or offering them to sub-tenants. This increases the supply and lowers the prices in the market.
The reports also suggest that smaller and medium-sized businesses are focusing more on operational efficiency and maintaining existing space rather than growing. As a result, lease periods have shortened from an average of five years to three years, due to the growth in the sublease market and economic uncertainty.
The areas with the most noticeable changes
The downward price trend in some areas of Tel Aviv began in 2022 and continued into the first half of 2023. Based on data from both reports, it is evident that areas that experienced the greatest rise in prices after the pandemic are now experiencing significant corrections.
For instance, Yigal Allon Street saw a decrease from an average price of approximately 160 NIS ($41) per square meter to 137 NIS ($36) per square meter, a drop of 14%, in just half a year. On Menachem Begin Road, prices decreased by 7.6% to around 144 NIS ($37) per square meter, and in the area of the stock exchange, prices dropped by approximately 8%, with the current price averaging 110 NIS ($29) per square meter.
However, some areas in the city have seen little change compared to the second half of 2022. For example, prices in Ramat Hahayal, a high-tech hub in northern Tel Aviv, remained stable at around 100 NIS ($26) per square meter. Similarly, prices in Sarona, a mixed-use complex in central Tel Aviv, stayed at around 150 NIS ($39) per square meter.
The influence of the Tel Aviv light rail
Another factor that affects the office rental market in Israel is the opening of the Tel Aviv light rail, which is expected to improve accessibility and mobility in and around the city. The reports indicate that some areas near the Red Line, which runs from Petah Tikva to Bat Yam, have seen slight increases in rental prices due to the anticipated benefits of the light rail.
For example, rental prices near Kiryat Aryeh station in Petah Tikva increased by 5% to around 70 NIS ($18) per square meter. Similarly, rental prices near HaTikva station in southern Tel Aviv increased by 4% to around 75 NIS ($19) per square meter.
The reports also predict that other cities along the light rail routes will benefit from population growth and rental fees. These include Ra’anana, Hod Hasharon, Haifa, Bnei Brak, and Rishon Lezion.
The outlook for the office rental market
Overall, rental prices in Tel Aviv are undergoing a correction, while stability and minor increases are observed in other areas of Israel. The reports suggest that this trend will continue until the end of 2023, depending on the recovery of the high-tech sector and the economic situation.
The reports also note that there is still a shortage of office space in Israel, especially for large companies that need more than 10,000 square meters. Therefore, they expect that new projects and developments will be launched in the coming years to meet the demand.
