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'Office space near talent is key to a company’s success'

Tel Aviv office market gone mad: High demand drives shortage, steep prices for space

Quality space in the right location has become as important to a startup as a patent, say commercial real estate experts

A view of the Azrieli towers and the surrounding buildings in central Tel Aviv. (Courtesy of Avison Young)
A view of the Azrieli towers and the surrounding buildings in central Tel Aviv. (Courtesy of Avison Young)

Tel Aviv’s office shortage and eye-popping prices have become so intense that a startup founder who had recently raised funds to grow the company wondered out loud whether he should acquire another startup strictly for its five-year office lease in a prime location in the city.

This tidbit appeared last month in a weekly real estate newsletter put together by Guy Amosi, CEO and managing partner of the Israel office of international real estate advisory firm Avison Young. The conversation took place during a meeting between the founder and members of the firm, Amosi relayed in the newsletter, distributed to over 4,000 global business leaders.

In a LinkedIn post later, Avison Young wrote that as much as such thinking sounds “removed from reality, it is also firmly attached to it.”

Over the past 18 months, “real estate in the right location has become… almost as important as [a] company’s patents,” the post read.

Demand for offices around Tel Aviv’s Savidor and Hashalom train stations has risen exponentially and supply is quickly decreasing, the firm said. The area, called the “scooter triangle,” runs along both the eastern and western sides of the Ayalon highway from the Arlozorov interchange to south of Yitzhak Sadeh Street, where the Azrieli Towers and Sarona anchor the space on Menachem Begin Boulevard.

The name denotes the preferred mode of transportation for many employees in a city that suffers from terrible traffic congestion.

An illustrative photo of a person riding an electric scooter in Tel Aviv, November 27, 2019. (Miriam Alster/FLASH90)

“Quality office space has become like a valuable patent in the sense that it is a gateway to making high quality hires. Office space located near the talent is key to a company’s success,” Amosi told The Times of Israel by phone last week.

During the first few months of the COVID-19 outbreak, real estate experts struggled to identify the impact that “work from home” rules would have on the office market. There were concerns of a severe glut of office space such as the case in 2003-2005, in the aftermath of the dot-com crash.

But despite employees’ preferences for working remotely, even partially, tech firms are aggressively expanding their physical footprint and focusing their attention on prime Tel Aviv office towers.

A study by real estate firm Avison Young shows rising rents for office space in Tel Aviv. (Avison Young)

Avison Young’s Tel Aviv Market overview for the second half (H2) of 2021 provides a clear view of the price and occupancy development in the Tel Aviv prime office market.

Its analysis indicates a temporary softening of the office market at the start of the COVID-19 pandemic in 2020 and a dramatic rebound in 2021.

Amosi noted that, today, rents would be even higher for Class A office space, which can command up to NIS 170 ($53.25) per sq. m. But the vacancy rates for such properties are close to 1%.

Research by commercial real estate consulting firm Cushman & Wakefield|Inter-Israel reflects similar trends. The company’s report for H2 2020 indicated year-on-year (YoY) decreases of up to 12% in both rental rates and occupancy in central Tel Aviv submarkets.

During that period, real estate developers and financiers maintained a holding pattern. While some companies were forced to let go of their space, the majority of tenants held tight. Six months later, C&W|Inter-Israel reported H1 2021 central Tel Aviv rental rates higher than their pre-pandemic levels.

Larry Garner, managing director for C&W|Inter-Israel, told The Times of Israel that “the Ayalon Highway-Menachem Begin corridor office market is the only place to be if you are in high-tech. Some clients have told me that the Ramat Gan Bourse [across the road from North Tel Aviv] is too far away!”

A view of the Azrieli buildings and the surrounding area in Tel Aviv, December 2, 2021, (Tomer Neuberg/Flash90)

Meanwhile, the pipeline for prime Tel Aviv office space is restricted. According to Amosi, approximately 35,000 sq. m. will be completed in 2022 and it is all pre-leased. In 2023, Landmark Tower (100,000 sq. m.) and One Tower (50,000 sq. m.) will be ready and several large pre-leases have already been secured, including 15 floors in Landmark Tower leased to Roomz, the serviced office subsidiary of the Fattal Group.

The bulk of office tower completions will come later, though, with the Azrieli Spiral Tower (67,000 sq. m. offices) scheduled for completion in 2026.

Google led the way

Tech giant Google led the trend for technology companies to move into central Tel Aviv office towers, when in 2005, the firm opened its first office in Israel in the Levinstein Tower on Menachem Begin Boulevard.

Prior to that time, most tech companies looked to Herzliya Pituah, about 15 kilometers north of Tel Aviv, as the Silicon Valley of Israel. Global giants such as Microsoft and Apple remain there today.

Google continued to lead the pack in securing Tel Aviv office space at a previously inconceivable price. In 2016, Google bought out Adler Chomski’s lease of four floors in the Electra Tower for NIS 40 million ($12.5 million) while agreeing to add 20% to the initial lease, paying NIS 110 ($34.5) per sq. m.

Office buildings including the Electra tower in Tel Aviv on August 13, 2019. (Gili Yaari / Flash90)

“Today, that deal would be considered a steal,” said Amosi of Avison Young. “It is possible to ask almost any price for office space in these locations because the real estate costs are insignificant in comparison to the cost of hiring and maintaining talent.”

The hunt for talent as key market driver

Ben Sand, VP of global operations and compliance at property management software company Guesty, told The Times of Israel that the company has incorporated the drive for talent into its Tel Aviv real estate strategy.

Guesty is currently leasing six floors in the Yachin Tower, an older renovated building from 1973 located on the edge of the scooter triangle. To stay ahead of the curve and, as Sand puts it, “prevent Google or Amazon from taking the space out from under us,” the company is subleasing part of its space to small tenants while maintaining it for medium- to long-term expansion.

Sand explained the strategy as part of a plan to draw the desired talent.

“Millennials want to come to work by foot or scooter. If they are software designers, they have the talent we are seeking to attract, and we must cater to their demands,” he said. Explaining why being slightly off-piste in Yachin Tower works for Guesty, Sand said the company has been actively trying to avoid a phenomenon called “the elevator pitch.”

“In the new skyscrapers, tenants are approached in the elevator to work at another company and by sundown, they have moved jobs,” he said.

Israelis rise scooters and bikes around Tel Aviv on June 9, 2020. (Miriam Alster/Flash90)

“The importance of hiring and maintaining talent is the driver of the Tel Aviv office market,” confirmed Ziv Shor of global commercial real estate services company JLL.

Shor, who specializes in tech clients, said he has “worked with startups with a headcount of 40-50, who are leasing 6,000-7,000 sq. m. The company is already anticipating a headcount of 400 people in two years and expects to take up all of the space.”

Farewell to traditional office tenants

Meanwhile, traditional financial services companies that once were the cornerstone of the Tel Aviv office market, “have left town or are on their way out,” said Garner of C&W|Inter-Israel.

The big insurance firms and some of the banks have already left Tel Aviv’s Rothschild Boulevard for suburban offices with lower municipal taxes and easier commutes. Bank Discount is building a new campus in “Ha’elef Park” in Rishon Lezion; Bank Leumi and Mizrahi-Tefahot maintain large-scale operations in Lod; Migdal’s extensive campus is in Petah Tikvah and Phoenix is in Givatayim.

This year, Bank Hapoalim acquired 60,000 sq. m of offices on the La Guardia Interchange off the Ayalon highway for delivery at the end of 2026. While still a Tel Aviv address, this location is far from Tel Aviv’s Rothschild, the financial district of yore.

Old and new buildings around the Rothschild Boulevard in Tel Aviv on September 8, 2021 (Nati Shohat/FLASH90)

The expert consensus is doubtful regarding an influx of tech companies into the old financial district.

“Rothschild is better suited for residential,” said JLL’s Ziv.

Garner concurred, saying, “The transportation and traffic issues make the Rothschild area less attractive for most office tenants.”

Yossi Cohen, operations and facilities manager at Israeli tech firm Perion, a provider of digital advertising products and services, provides a different perspective on the office market.

Perion’s headquarters and R&D center are located 10 kilometers south of Tel Aviv in Azrieli Park, Holon. Cohen contends that Perion is getting excellent value for money in leasing its 10,000 sq. m space.

“We pay a third of the current rates in Tel Aviv and have beautiful offices with excellent facilities for our employees. Moreover, we have lower employee attrition than in Tel Aviv. Our talent is older with families that live in the suburbs surrounding Tel Aviv like Petah Tikvah, Rishon Lezion and Rehovot. They tend to take things more seriously when considering a career move,” said Cohen.

At the same time, Cohen reported that the company has made many new Generation Z hires from Tel Aviv. Azrieli, in partnership with the office park tenants, has introduced a taxi shuttle from southern Tel Aviv’s Hagana train station to the office complex in Holon. The service is fully subsidized by Azrieli and the employers, providing a short ride against commuter traffic to Tel Aviv.

Amosi estimated that the Tel Aviv real estate madness will not end anytime soon. The interminable Tel Aviv traffic and the burgeoning young talented population are just part of the story, he said.

“The global supply chain crisis has created a shortage of building materials leading to construction delays and intensified scarcity,” Amosi pointed out.

Meanwhile, employers are seeing the benefits – despite all costs – that are made possible by providing young talent with access to both home and an office just a scooter ride away.

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