Demand for office space slackens, but still outstrips supply

Occupancy rates nationwide are at 90 percent and above.

By JOHN BENZAQUEN
Ramat Gan 88 224 (photo credit: Courtesy )
Ramat Gan 88 224
(photo credit: Courtesy )
Amid the weakening economy, demand for office space seems to have slackened, but rentals are not set to fall because as things stand demand still outstrips supply. According to rough estimates, there is a shortage of 150,000 to 200,000 square meters of space, especially in the metropolitan area of Tel Aviv. The shortage is also evident in other parts of the country, including Jerusalem and the hi-tech areas around the Weizmann Institute of Science in Rehovot. The shortage of office space can be a big problem, and in normal times it can impede economic growth. But these are not normal times; there is an economic downturn in the offing and this may affect demand for office space in the future. The shortage can be traced to the last economic downturn, in 2001. Until then, the hi-tech industry was booming. There was a scurry to build office tower blocks to meet the expected demand because most people believed that the boom would last forever. It didn't. When it came, the crunch was very painful for the real estate industry. Developers suddenly found themselves with a lot of unwanted space on their hands, new projects were canceled and those already under construction were slowed down. There was an overhang of nearly one million sq. m. of office space, approximately a third of all space available. Wary developers only started new projects in 2005 - and that is the root of the current problem. Our economy has been booming since 2004, the overhang has been liquidated, and a shortage has ensued. "There is an occupancy rate of 97 percent in office buildings in the Tel Aviv-Ramat Gan area," Amir Ilan, Business Promotion Manager at Inter Israel Real Estate Consultants, told The Jerusalem Post. "Despite brisk demand for office space, during the past five years only 100,000 sq. m. of office space were added. This includes the 25,000 sq. m. Azrieli Square Tower, the 12,000 sq. m. Weizman Tower, the second phase of the 25,000 sq. m. Yuval Tower, phase 2 of the 18,000 sq. m. Tidhar-Rogozin Tower and some other smaller projects. "Despite brisk demand for office space in the Ramat Gan Diamond Bourse," Ilan added, "only 30,000 sq. m. of office are in the building stage: the 20,000 sq. m. Chogi Tower and the 10,000 sq. m. Olympia Tower." Another 100,000 sq. m. are being built all around Tel Aviv, he added, listing the Elco Building (60,000 sq. m.), phase two of the Kardan Tower (15,000), phase two of the Efi Tower (10,000), the Rothschild Tower (5,000) and other smaller projects. "That means 130,000 sq. m. should be coming on stream soon in Tel Aviv alone," he noted. "Neverthless I am of the opinion that because of the current situation some of these projects may be put on hold." Chen Chogi, VP General Counselor of the Chogi Construction and Development company, believes that the shortage of office space will not be resolved in the near future. "At these uncertain times, it is difficult to predict trends," he said. "If, as most experts believe, there is a relatively mild economic downturn, then the shortage of office space will continue. Demand will diminish, but because of the current shortage of space, prices will remain steady." What the expected downturn may well do is interrupt the flow of new projects. It takes four to five years to build a 20- to 30-story building - 18 months to obtain a building permit, provided the building is within the prescribed zoning laws, and 30-36 months for the construction work. The shortage of office space, as reflected in the high rate of occupancy cited by Ilan, is reflected nationwide. In the Herzliya Pituah industrial area, for instance, there is an occupancy rate of 95%. In the past five years there, only 35,000 sq. m. of office space was added and 50,000 sq. m. is under construction. In the industrial zone of Bnei Brak, occupancy is also 95%, though that may improve because there are plans to build an additional 90,000 sq. m. Petah Tikva's industrial zone has an occupancy rate of 90%, as does Netanya's.