Tech Deals Revive Tel Aviv’s Office Market

Three major leases signed last week by tech companies for office towers have boosted the Tel Aviv market, but surrounding cities are struggling to attract tenants.

Recent times have not been the best for Israel office real estate sector. The slowdown in the tech industry in Israel and worldwide, the rise in interest rates, the political instability in Israel, and of course the war have all contributed to a major slowdown, especially after the boom in 2021 and 2022. Market studies have shown a significant fall in rental prices per square meter, and even a certain decline in occupancy, which Israel’s office market has not seen for a long time.

It seemed that the slowdown was continuing, until within a week three big deals were concluded, thus shuffling the deck. Google leased 20 floors in the ToHa2 tower in Tel Aviv for NIS 155 million annually, while Palo Alto Networks, is significantly expanding the number of floors it leases in the Alon 1 tower in Yigal Alon Street, and after 30 years in Herzliya, the Pitango venture capital firm is moving to Tel Aviv’s new Landmark tower.

“The center of Tel Aviv is behaving differently”

There is no doubt that the real estate industry for offices is in a global slowdown, mainly due to the slowdown in the tech industry. Two years ago there were record deals for NIS 200 per square meter in central Tel Aviv. According to the report of commercial real estate specialists Newmark Natam for the second half of 2023, rents for offices in one of the hottest areas at that time, Yigal Alon Street in Tel Aviv, dropped by 27% within 18 months.

The latest three deals reported could be a turning point. The three deals reflect NIS 130-150 per square meter per month. These are substantial declines from the previously mentioned peaks, but real estate professionals do not see this as a sign of a crisis, but rather a return to sanity.

Newmark Natam VP Or Ben Zvi Klein says, “The records recorded two years ago are the exceptions, and that’s how it should be treated. The prices of the latest deals are good market prices, which do not indicate a crash. These are minor changes and adjustments to the market situation, nothing more.”

Is this a trend that demonstrates the recovery of the entire market? “There has been more traffic recently,” says Ben Zvi Klein, “but companies are taking more time than before to choose the tower and the area. They are taking advantage of the opening of new projects in convenient locations, and they have an alternative to the office where they have been for years, which did not exist until now. A good for the resilience of the industry is also reflected in subleases (a tenant who rents out the space they rented to another company). They are not long-term, but for two or three years. This indicates that the companies assume that they will need the space again soon.”

Real estate consultant Itai Shafran and a partner in Economic Planning solutions says, “In the office sector in Israel, you always have to divide things into two – the State of Tel Aviv and the rest. There are quite a few places that face stagnation, but in Tel Aviv this does not necessarily happen. The city center is the heart of the office sector in Israel, and it functions differently. Tel Aviv will continue to be the most sought after, and a center of attraction mainly for the tech industry, and as long as this sector continues to recover, we will see more deals like this.”

“The world of offices is in a completely challenging time,” says Ben Zvi Klein, “but a challenging time is not necessarily a difficult or bad time for the industry.”

“We’ve been at the bottom for almost two years, but we’ll still see the rise coming,” Shafran says with certainty, “especially when high-tech returns to develop and grow, after the halt we’ve all experienced, in Israel and in the world.”

The content of this article is designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction