Rising demand for office space pushes rents higher

The office space market is recovering quickly after a five-year low, and prices are rebounding to the peak levels of 2000.

By ELAZAR LEVIN, THE BUSINESS POST
azrieli towers 88 298 (photo credit: Ariel Jerozolimski)
azrieli towers 88 298
(photo credit: Ariel Jerozolimski)
The office space market is recovering quickly after a five-year low, and prices are rebounding to the peak levels of 2000. One extreme example of the this is the deal that Meshulam Levinstein Contracting and Engineering Ltd. is about to sign; Levinstein will lease the top two floors, the 30th and 31st, of the Levinstein Tower (also called Discount Tower) on the corner of Yehuda Halevi and Herzl Streets in Tel Aviv, to two US investment houses, for a record price of $27 per sq.m., per month, the likes of which have not been seen since the heady days of 2000. Another deal indicating the market's new situation is that involving real estate company Mekorot Control and Development, which last July leased 300 sq.m. of the 14th floor of the Vered House office building in Givatayim from STG Company. It paid STG $15 per sq.m. per month, in a three-year contract with an option for a two-year extension. "We leased the space at the last minute, before prices rose," company owner Roni Ben-Yehuda told The Bpost. "If we had leased the offices today, we would have paid at least $18 per sq.m. per month." In the final months of 2006, there was a 15% spike in prices in the office space market in Tel Aviv and Ramat Gan, where most of Israel's office transactions are concentrated. Apparently, 2001-2005 were the toughest years in the industry's history: There was a supply of hundreds of thousands of sq.m. in new buildings, and low demand. Rental fees in the Azrieli Towers, for example, fell from $22-24 to $14-16 per sq.m., per month, and occasionally even less. The picture was similar in the Platinum Tower on Ha'arba'a Street and in other modern buildings in the city. Clal Insurance leased out five floors in Ramat Gan's Moshe Aviv Tower for about $15 per sq.m., per month, compared with $19-20 per sq.m. in previous transactions in the building. The Government Housing Administration took advantage of the situation, and its director, Gabi Shohat, made an excellent deal at the time with Africa Israel and Minrav, which built the Kirya Tower, on the corner of Kaplan Street and Begin Way in Tel Aviv: He leased 26 floors from them, about 40,000 sq.m., for $14 per sq.m., in a long-term contract. But 2006 was the year of the big turnaround. Rental fees for offices in Tel Aviv and Ramat Gan rose in the first half by about 7%. The real reverberations began to be felt in July, and they have continued until today. What caused it? Natan Hetz, one of the owners of the Aloni-Hetz and Amot Companies, which own large inventories of office space, explains: "The rapid recovery stems from the accumulation of several factors simultaneously; growth led to a natural demand for offices. Developers built nearly nothing in recent years, so the inventory of hundreds of thousands of sq.m. ran out. Investors and companies from abroad began buying offices as an investment, or leasing offices in order to develop their business in Israel. Old offices are leaving the inventory, and sometimes they simply stand vacant." Amos Glazer, CEO of Anglo-Saxon Tel Aviv, adds: "The supply of high quality office space in Tel Aviv and Ramat Gan is in decline, in the wake of transactions that were completed. Companies and others exploited the cheap prices that existed in the market, and moved to new buildings. The Japanese and Danish Embassies, for example left old buildings, and through us, leased entire floors in the Museum Tower (of the Migdal Insurance Company), next to the Tel Aviv courts." In recent months, there has been a noticeable division of the market into two sub-markets - modern offices, for which the highest rental fees and sale prices can be obtained, and old offices, which are difficult to lease out or sell, even at low rent. Hetz: "Once, there were tens of thousands of square meters available in the Moshe Aviv Tower in Ramat Gan, in the Diamond Exchange area. Today, there are perhaps 5,000 sq.m. available, and even they are not in large units, but rather dispersed among the floors, and there is a list of power lessees." Glazer: "Today it is impossible to find an available unit of 500 sq.m. in Tel Aviv's City." The rental fees in recent transactions in the Azrieli Towers, mainly contract renewals, reached about $18 per sq.m. (all data are for a fully finished sq.m., unless otherwise noted), less than the peak of 2000 but much higher than 2005's low. Offices in the Africa Israel Building, on Weizmann Blvd., were recently leased for about $18 per sq.m. An attorney leased 200 sq.m. in the new Renuar Building, on Ahad Ha'am Street, for about $17 per sq.m.. The Museum Tower, which had stood empty for a considerable period, was quickly leased out in recent months; Israel Aerospace Industries leased 120 sq.m. for $17.5 per sq. m. per month, and a law firm will pay $18 per sq. m. per month. This contrasts with $14 per sq.m. two years ago. The Hollandia Furniture Company leased 250 sq.m. for its offices in Sharbet House, opposite the shore, for about $17 per sq.m., compared with $12 per sq.m. during the low period. Offices at Gibor House in Ramat Gan were recently leased for $18 per sq.m., a 30% increase over the recent low period. Leasing of the modern office towers in Tel Aviv ended about a year ago, and there is hardly any available inventory. That is what happened at the Sonol Tower, the Museum Tower, at Europe Israel House, and at the first Levinstein Tower on Begin Way. The only modern building in Tel Aviv currently on the market is the second Levinstein Tower, on the corner of Yehuda Halevi and Herzl Streets, owned by Meshulam Levinstein Contracting and Engineering Ltd. The bottom 20 floors were leased years ago to Israel Discount Bank, at a relatively low rate. The developers recently completed construction of 11 additional floors, and lessees have already been found. The Bronfman-Fischer Group leased from Roni Ben-Yosef, the owners of floors 24-26, 420 sq.m. for $24 per sq.m. The Apax investment house leased two floors for $22 per sq.m. And, as was said, two US-based investment houses leased the tower's top two floors at record prices. Despite all this, at the Kirya Tower on Kaplan Street in Tel Aviv there are still nine empty upper office floors, totaling about 20,000 sq.m., awaiting lessees. Recently, the Rosen-Basas law firm leased 300 sq.m. for just $15.50 each. The developers, Africa Israel and Minrav, were certain of the project's success. Avraham Kuznitsky, Minrav's controlling shareholder, said at the time: "Our tower will be opposite the Azrieli Towers, and there is no reason why it should be less successful than they are." His prediction has not materialized, and the reason for that is not really clear. It is possible that the security there is too cumbersome, perhaps the developers are conducting negotiations to lease a large space to the Defense Ministry and are not initiating leasing to others, and may there is no special reason, just as sometimes happens in the real estate market. It is no wonder that Amidar, the government housing company, has reared its head and is demanding no less than $16 per sq.m. to lease out its 4,500 sq.m. office building on Tel Aviv's Shaul Hamelech Blvd. The fact that it is a 40-year-old building in need of renovation does not deter the company's chairman, Doron Cohen, who tells The Bpost simply: "If the nearby Museum Tower and Europe-Israel House are getting $18 and up per sq.m. per month, there is no reason why we should not demand $16 per sq.m." That, of course, remains to be seen. One purchase deal also deserves mention: Canadian-Jewish millionaire Gerry Schwartz bought Levin House on Rothschild Blvd. in Tel Aviv, from Alfred Akirov's Alrov Company. He paid $8.5 million for the 700-sq.m. building, a record $12,000 per sq.m. Everyone agrees that, with the exception of the Kirya Tower, there is hardly any available office space in Tel Aviv and Ramat Gan. This fact, along with the continuing price rises, led a host of developers to the decision to resume building offices, some outside the city. Arkady Gaydamak bought the ZIM lot on Rothschild Blvd. from United Mizrahi Bank for $26m., and he is expected to build a 21,000-sq.m. office building on the site. Nicholas Bregorine bought the lot on the corner of Rothschild and Allenby from Louis Noi for $30.2m., where he is supposed to build a 32-floor office and residential building. The Tel Aviv Municipality and Tel Aviv University will build a 40-floor tower with about 50,000 sq.m. of office space at the Atidim hi-tech industrial park in the northern part of the city. Ten thousand sq.m. of office space are slated for construction at Airport City. Danisra will build 26,000 sq.m. at Afek Park in Rosh Ha'ayin. Will the plans for new construction again reverse the situation and in another two to three years lead to a glut in supply and to a drop in prices? Stay tuned.