In a surprising turn of events, Israel’s real estate market is experiencing a decline in apartment sales, but construction activity is reaching unprecedented levels, defying expectations. According to data released by the Central Bureau of Statistics, the third quarter of 2023 witnessed the commencement of construction on 17,615 housing units, marking the fourth-highest level in the past 25 years.

The issuance of building permits in the same quarter reached the third-highest level since at least 2018, with 20,287 permits granted. This data, coupled with the assurance from the Central Bureau of Statistics, indicates that the robust pace of construction is expected to continue well into 2024, despite a downturn in developer sales.

While the total construction permits for approximately 47,600 apartments in the first three quarters of 2023 show an 11% decrease compared to the same period in 2022, the overall construction permits of about 52,000 units represent a more modest 6% decline. These figures, though declines, are significantly less severe than the 40% or more drop in apartment sales recorded over the past year.

The construction boom is not without challenges, especially in the aftermath of the war with Hamas that led to the exclusion of Palestinian workers from construction sites in Israel. The industry is now compelled to find alternative labor sources from other countries to sustain the ongoing construction surge.

A paradox emerges when comparing the high construction starts with the free fall in apartment purchases. This discrepancy can be attributed to differing timelines — the construction starts reflect processes that span several years, from land acquisition and planning to obtaining approvals and building permits.

Some of the construction starts in the third quarter of 2023 may have originated from initiatives dating back 4-5 years, possibly initiated during the tenures of former Ministers of Finance Bezalel Smotrich and Yitzhak Goldknopf but brought to fruition during the terms of Moshe Kahlon as Minister of Treasury and Yifat Shasha-Biton as Minister of Housing.

Tel Aviv, despite experiencing a notable decrease in property transactions over the past two years, takes the lead in construction starts with 5,907 apartments initiated between October 2022 and September 2023, marking an 11% increase from the preceding period. Jerusalem follows with 4,012 starts, while Bat Yam and Ashkelon recorded 2,548 and 2,082 construction starts, respectively.

An intriguing aspect of the construction landscape is the focus on urban renewal, with approximately 53% of the 11,950 apartments initiated as a result of demolishing existing buildings and constructing new ones concentrated in the Tel Aviv district. The Central district accounted for about 28%, indicating a growing trend towards revitalizing established urban areas.

Notably, 76% of the apartments resulting from demolitions and reconstructions, amounting to 9,090 units, were carried out under TMA 38/2 and evacuation-construction initiatives, showcasing a concerted effort to enhance the resilience and sustainability of existing structures.

In conclusion, while the decline in apartment sales poses challenges for developers, the robust construction activity signals a promising future for the Israeli real estate market. The record-breaking construction starts and building permits reflect a forward-looking industry that continues to adapt and thrive amidst changing economic and geopolitical landscapes.