Israels commercial property market in recovery

jerusalem | For Israeli commercial property developers and managers, there’s been some good news in the real estate sector.

With a spate of new high-tech office deals, demand for new buildings and space on the rise, stabilized rental rates and rising occupancy rates, the market may be on the rebound.

According to research gathered by Natam Industrial & Commercial Real Estate in Tel Aviv, rental markets in most markets have stabilized and prime retail occupancy rates remain high. In addition foreign and local investors have increased activity by 100 percent from the previous 12 months, with a total of $455 million in equity invested last year.

“The past year has seen an increase in activity,” said Adina Cooper, a managing director at Natam. “For a while it was just about leasing and improving premises for a better price, but now it’s also all kinds of companies — biotech, communications, software and hardware developers — taking larger spaces.”

In the pre-intifada days, when the real estate market hadn’t yet hit an all-time low, high-tech companies paid an average of $16 to $17 per square yard for premium space in the country’s center, in areas such as central Tel Aviv, Ramat Hahayal, Kiryat Atidim, Herzliya Pituach and Ra’anana.

Companies in Tel Aviv’s Azrieli Towers paid upward of $21 per square yard per month for office space. The two Azrieli towers still had a 98 percent occupancy rate in late 2001, although prices were down to under $20 per square yard. But by 2002, prices had fallen to $14, $10 lower than the original $24 price when the complex first opened.

Since 2000, the average demand for space has dropped from thousands of yards to a couple of hundred yards in Tel Aviv, according to Amos Glazer, managing director of Anglo-Saxon Real Estate in Tel Aviv. “There are no clients around who need or can afford that much space,” he said.

What happened, according to Natam’s Cooper, is that pricing has finally stabilized following the boom of the mid- to late-1990s.

Besides the lower rental rates, the local and foreign investors re-entered the market because more spaces are available as banks “are finally foreclosing on properties, whereas they weren’t beforehand,” said Cooper.

Moreover, with interest rates down, it makes sense for investors to buy when they can gain a yield of 10 percent and borrow at around 6.8 percent when purchasing a property. It’s a far cry from two years ago when banks were more cautious about offering financing for investments in properties that were earning only $12 per square yard — hardly enough profits to go around for a property’s developers, contractors and banks.

But now things have changed.

“There’s lots of investment in real estate and more foreign investors than there had been in the past two years,” Cooper says. “The foreigners are looking at more stabilized assets and the locals are looking for added value.”

The search for added value is taking place among investors and leasers. For investors, the aim is to purchase and develop buildings that can be upgraded and then leased with long-term contracts that will offer a solid profit on the investment. For leasers, or companies seeking space, the goal is honing in on the right space at the right price, considering that the commercial real estate market has internalized the current pricing.