09/07/2012 | By Daniel Baraz and Nitt Bregman
The office market in Tel Aviv, the financial and business center of Israel, provides an interesting comparison with the rest of the country. While we have seen that occupancy in Israel is on the decline, Tel Aviv presents a different picture.
Occupancy in Tel Aviv was on the rise in the last three years and is close to 100 percent in properties held by listed companies. The impression that Tel Aviv is in much better condition than more peripheral submarkets is reinforced if we look at the index of rents (in real prices).
We can see that real prices declined only slightly, around 2 percent over a period of three years, while in Israel they declined overall by almost 10 percent. Since the Israel data include Tel Aviv, the decline in the periphery has been even sharper.
Cap rates in Tel Aviv declined slightly, in contrast to a slight rise in Israel overall. Cap rates in Tel Aviv declined despite the rise in occupancy and nominal rents, since property appreciation was higher at 5.6 percent than the rise in net operating income (NOI), 1.6 percent.
Israel, in general, and Tel Aviv, in particular, weathered the 2008-2009 crises well. Nevertheless, there is a question of what will happen in the next several years. There are a significant amount of projects in the pipeline. There are more than 500,000 square meters of office projects that have gone beyond the planning stage and could be expected to come into the market in the next five years.
This addition is significant as it constitutes about a third of the existing stock of comparable buildings. (The projected completion of these projects in the next five years is summed up in the chart number 4.)
In addition to these projects, there are hundreds of thousands of square meters in the planning stage. Nevertheless, it is uncertain which of these projects will actually be built in the short and medium term, due to the availability of financing and uncertainty as to the macroeconomic situation.
Tel Aviv in a global perspective
As mentioned earlier, the effects of the 2008-2009 crisis on the income-producing property sector in Israel were minor.
Prices did not go up in Israel and in Tel Aviv prior to the crisis as they have in Manhattan or even in London, and as a consequence, they remained relatively stable. The stability of prices is reflected also in the relative stability of cap rates.
To sum up, Tel Aviv is by far the primary office market in Israel. More than a third of the office space owned by listed companies is in the city of Tel Aviv itself. This market has been stable over the last several years, evading most of the repercussions of the 2008-2009 crises.
The stability of this market is reflected in the close to 100 percent occupancy rate. Nevertheless, this market, precisely because of its centrality, is undergoing unprecedented development of new office space. The effect of this development of the market is yet to be seen. It depends to a large extent on the global and local macroeconomic conditions, which are clouded by uncertainty at present.
* Nirit Bregman and Daniel Baraz founded B-BRE as a real estate research and consulting firm focusing on the Israeli commercial real estate market. B-BRE's flagship project is the creation of a commercial real estate database for Israel, which we are pursuing in partnership with the Forum Group.