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Office Space Oversupply Challenges Tel Aviv’s Real Estate Landscape

by | Feb 2, 2024 | Real Estate | 0 comments

In a striking turn of events, the once-booming demand for office spaces in Tel Aviv and Ramat Gan has dwindled, leaving prestigious towers like Azrieli and Yigal Alon with entire floors standing abandoned. A recent study by Dr. Rina Degani of Geocartography reveals that approximately 80,000 square meters of office space in these areas remain unoccupied, challenging the record-high occupancy rates of just two years ago, which reached 100%.

According to Jackie Mukmel, former CEO of CBRE Israel, the excess supply may be even greater, estimating a surplus of 1.7 million square meters between Netanya and Holon, with about a quarter located in Tel Aviv’s towers. The challenge for tower owners lies not only in the decreased demand but also in the competition posed by newer, more modern towers.

The Israeli office real estate market faces unique challenges, including a lack of transparency, manipulations by entrepreneurs and property owners, and a general difficulty in obtaining accurate data. Unlike the residential sector, there is no centralized monitoring body, further complicating efforts to understand and analyze the market’s dynamics.

Geocartography’s recent study focused on offices in Tel Aviv and Ramat Gan, revealing that the shift to remote work, accelerated during the pandemic, gained momentum even during the subsequent war. New and prestigious towers now show over 15% of offices with excess space, some appearing abandoned or closed on certain days due to remote work.

Companies, bound by lease agreements, often don’t return surplus areas to property owners and instead seek subleases or expand existing workspaces to maintain an appearance of business as usual. This sublease trend contributes to the semi-underground nature of the market, making it challenging to gauge accurate rental prices.

Prices in the office market have dropped, with offerings in Azrieli Towers ranging from NIS 110-150 per square meter, a significant reduction from the peak two years ago. Mukmel estimates price reductions of up to 30%, particularly in towers established by purchasing groups and areas sold by sub-tenants.

Demand for office spaces, primarily from small businesses, remains concentrated in Tel Aviv, with almost half of the offices having up to ten employees. However, the supply has outpaced demand, with approximately 1.5 million square meters of offices built in the Tel Aviv district over the last five years.

Dr. Degani anticipates that the real challenge lies in the completion of approximately half a million square meters of office buildings in the next couple of years, exacerbating the current surplus. Even in a challenging market, the demand for at least 160,000 square meters is expected, leaving owners of around 340 thousand square meters struggling to find tenants.

The duration of the ongoing tower crisis remains uncertain, influenced by factors such as hybrid work trends, the political and geopolitical situation, and the global economy. As the market grapples with these complexities, the once-thriving office real estate landscape in Tel Aviv faces a period of significant adjustment.

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