Sharp declines in office and commercial rents, after 5 consecutive years of increases

• Expect further rent reductions

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Produced by the Department of Special Supplements

A sharp decline in rental prices in the office industry in the second quarter of 2020 compared to the previous quarter, according to a study by CBRE Israel. The reason for the decline: there has been a marked slowdown in business activity following the corona plague.

According to Jackie Mukamel, Chairman of CBRE Israel, the decline came after more than 5 years of continuous increases in the industry. "Office rental prices were on the rise and reached a peak that placed Tel Aviv in 15th place in the world. We are now seeing a sharp drop in prices, especially among purchasing groups. "

According to the study, the cities of Bnei Brak and Petah Tikva were particularly significantly affected, due to the large number of projects in the office industry, the high level of competition and the activity of many purchasing groups.

Mokamel expects further reductions in office rents in the second half of 2020, following a decline in demand, vacancy of office space as a result of the move to work from home and the desire to reduce costs as much as possible.

The rent for offices in Tel Aviv decreased by 6%, from NIS 104 per square meter to NIS 97. In Raanana there was a decrease of 7% to NIS 56 per square meter, and in Herzliya the rent decreased by 6% to NIS 80 per square meter. "Only in the city of Haifa did the rent remain stable, NIS 65 per square meter.

In the Jerusalem area, the decrease is relatively small at a rate of only 1%. This is in light of the fact that a large part of the office space in Jerusalem is home to government ministries and service companies that relate to government activities.

Office occupancy also fell in the second quarter in most major cities, by 2% to 4%. The occupancy of offices in Tel Aviv is 93%, Ramat Gan 91%, Petah Tikva 85% and Herzliya 92%.

A number of large companies have already reported a significant reduction in the volume of work from the firm, including Matrix and LivePerson. Leading international companies such as Facebook have announced plans to increase work from home.

Trading stopped

Of course, the shopping centers have also been severely affected by the Corona crisis, and the situation is reflected in the decline in commercial rents. The damage is particularly severe in the closed shopping centers.

The quarter began with the closure of stores and shopping centers amid the spread of the plague. Subsequently, the opening of stores and malls began under restrictions on the number of customers. These restrictions have reinforced the continuing trend in recent years of an increase in the volume of online commerce. This may also have an effect in the course of the crisis.

Commercial property owners have had difficulty collecting rents, and in some cases have moved to collection based on a percentage of sales turnover. Many tenants have approached property owners with a request to reduce and even stop rent payments due to restrictions on running their business.

Rents in commercial areas in Tel Aviv decreased by 10% in the second quarter and reached NIS 176 per square meter. In Ramat Gan, there was a decrease of 7% to NIS 128 per square meter. Rents for commerce in Raanana fell by 5% to NIS 90 per square meter. In the cities of Haifa, Herzliya and Lod, rents remained stable compared to the first quarter.

Stocks in trouble

"The study shows that the positive sentiment that pushed investors into the real estate sector has become a concern regarding the current situation and the future situation," said Mukamel. "The growth expectations that accompanied the office sector in particular have been significantly reduced. The capital market responds to developments and gives its forecasts, which affect the share prices of income-producing real estate companies.

The decline is particularly noticeable in companies exposed to commerce and offices and is noticeable among companies with significant entrepreneurial volumes. According to Mukamel, it may be a sign of the future to come in the real estate market, which usually responds a few months late to the financial market.

Real estate stocks experienced a significant decline this quarter. The returns inherent in stock prices rose to 7.5% to 8%. These increases embody the concerns among investors regarding the future of the income-producing real estate market. The price reflects an expected decline in the rental market, which will be reflected in a decrease in occupancy and rental prices.

Produced by the Department of Special Supplements