Why Office Real Estate in Israel is Booming, Despite COVID-19

Why Office Real Estate in Israel is Booming, Despite COVID-19

By Contributing Author

As Israel enters its third (and hopefully last) lockdown, with a majority of its senior citizens set to be vaccinated by the end of January 2021, it would be wise for policy makers to start analyzing the country’s economic situation, in order to measure just how badly it was hit by COVID-19. True, the Israeli economy did enter this crisis in a position of strength, but the real financial effect is yet to be fully understood.

One sector which we can say by now has managed to persevere despite the economic blow is the real estate sector – and, specifically, office real estate. This is very interesting, since a dominant part of Israel’s business has shifted to a ‘work from home’ model. Let’s try to understand just how this is possible, and what conclusions real estate investors can reach from this.

Home base

While many employees, especially of ‘high-tech oriented’ companies, have made a transition to working from home, this doesn’t mean these companies don’t need a physical office anymore. Since no one really knows how long restrictions will last or how severe they are going to be in the future, companies couldn’t just give up their office space, or even settle for smaller space.

Microsoft Israel is a great example of that. In the midst of restrictions, with the majority of employees working from home, the tech giant has opened up its new office building in Herzliya – with enough room for 2,000 employees and at an estimated cost of $105M. The message here is clear: Whether most work is from the office or not, companies are still going to need it around. “We aimed to create a space that would continue to be relevant for decades, no matter what comes next,” said Vered Gindi, the architect behind the design of the new complex.

With this in mind, one can understand why the demand for office space did not shrink – at least not significantly. Owners and investors therefore turn to this type of real estate for a guaranteed income, rather than invest in stores or commercial centers. While working from home is a tactical solution to the problem caused by the pandemic, it will probably not turn into a strategy or a common practice in Israel.

Admission

All throughout the pandemic, the Israeli government was focused on keeping as much of the economy going as it thought it could. Ministers tended to be lenient toward businesses with no public reception, meaning workplaces where other than the employees, no other people enter the office. This enabled companies, especially smaller ones, to keep working normally (whether in full capacity or in capsules).

Let’s take a look at Israel’s three lockdowns to understand. During the first one, back in March and April of 2020, all businesses were forced to shut down: stores, offices, and factories alike. For the second lockdown, in September and October of 2020, the government was a bit smarter and was quick to let offices open up, with the condition that there is no public reception. The third lockdown, happening now, does not even include office workers – once again, all with the assumption that public reception is not a part of the equation.

Once again, you can see why the demand for office space stayed pretty solid, even during the harshest of restrictions. Faced with the choice of which type of property to invest in, investors opted to go where they saw business was as close as possible to normal, and that explains why not only the demand for office space was steady, but the supply side stayed steady as well.

Split rent

Heavier real estate investors and developers also opted for office building property, over large commercial centers or residential buildings. While the rent from office space is much higher than that of its residential counterpart, it is still not as high as commercial space tends to be. However, the blow taken by stores and shops in Israel was far more substantial than that of office space (with many of them not surviving the lockdowns and closing down).

“Mishorim own’s and manages small to medium size office buildings, located in peripheral areas in Israel and not in our around the center of Tel Aviv, so most of our tenants are small businesses. In this situation, we are not dependent on one large tenant, but rather on many small ones renting office space. That way, if one of them needs to vacate for whatever reason, our income isn’t hurt substantially, and we are usually able to find a substitute tenant in a short period of time” explained Daniel Leventhal, CEO of Mishorim, a veteran real estate company operating in Israel and North America. “Although due to the highly extreme situation, we have done are best to show some flexibility toward tenants who were having problems paying rent as a result of the virus.”

Alt text: An office building owned by Mishorim in the Science Park of Rehovot, Israel.