After a strong start in the first two months of 2020, real estate activity slowed sharply across most sectors as a result of the restrictions imposed in March to tackle the COVID-19 outbreak. After almost complete paralysis of real estate activity during the closure period, the economy returned to work in mid-April, but with significant changes to work routines and behavior as concerns over the pandemic continue to impact every aspect of society. As a consequence, every sector of the real estate market continues to be affected by the crisis.


Offices

Economic stress, rising unemployment, a rise in remote working and an uncertain economic outlook have combined to impact office demand during 2020. Analysis across the office types and locations that make up the market2 reveals that The amount of sublease/secondary market space has therefore increased and will likely continue along that path in 2021. This influx of market supply will continue to exert downward pressure on asking rental rates and increased expectations for landlords to increase concession packages offered to prospective tenants. overall, rents have declined by around 7% on average across the market as a whole as a result of the COVID pandemic. The biggest impact has been seen in the central area where the rents are higher, especially in Herzliya, where the decline is around 9%, whereas better quality space in the prime Tel Aviv locations has held up better, seeing declines of only 6%. Looking forward to 2021, we expect to see this pattern continue with further declines evident across most areas of the market. Rents on the best space will soften by a further 7% to a total of 87-88% decline in the on average across the market for 2021 as a whole as a result of the COVID pandemic.

Israeli tech companies raised around $2.8 billion in 2019 and despite the pandemic, this has been deployed to drive the expansion of the sector in 2020.

As discussed in Avison Young’s 10 Trends for 2021 forecasts, the widespread trend towards remote working seen this year is expected to continue to impact the market, although we expect most employees to adopt a “hybrid” approach once the immediate pandemic dies down. It seems that companies will continue to evaluate and weigh strategies for real estate cost-cutting and concerns over health and wellness, but will also be conscious of the potential drawbacks they are experiencing with remote work, which may include diminished efficiencies and lack of crucial interaction and essential team building. Overall, we expect demand for space to reduce in the short term, with some companies shrinking their portfolios by anything up to 25%. However, at least part of this is a normal response to a recession of this magnitude; whilst some changing work patterns will endure, demand is also likely to evolve over time. As discussed below and in our 10 Trends for 2021, companies are expected to make greater use of flexible and “work near home” options within their portfolio. The impacts on the office market will therefore be more complex than a simple decline in aggregate demand for space.

Commercial office owners are trying to find comprises with tenants to retain them in their buildings, while alleviating the tightening financial strains that many business are currently experiencing. Some solutions have been deferred rent arrangements, reduction of office space in exchange for extended lease terms, and owners undertaking renovations to the premises.

Savvy institutional owners are also exploring ways to improve the health and wellness in their buildings, as this is becoming a key concern for occupiers looking to attract and retain top talent in their workforce. Such measures include increasing intake of natural air, replacing that air more frequently, upgrading filtration systems, installing UV lights that are able to weaken virus particles in the air, and utilizing antimicrobial film on surfaces in the building.

One bright spot is the tech sector, as many companies have turned their attention to technological solutions to deal with the pandemic and its impacts. Hardware and software companies have benefited from the growth in activity, not least those supporting the growth in flexible working. This is providing a further boost to a sector which is already one of the strengths of the Israeli service sector economy. Israeli tech companies raised around $2.8 billion in 2019 and despite the pandemic, this has been deployed to drive expansion of the sector in 2020. There are now 25 Israeli “Unicorn” companies (startups that have grown to over $1billion in size) out of a global total of 600 such companies, reflecting the strength of the Israeli tech sector. Demand from tech companies will continue to undermine the expansion of the office sector through 2021.

Flexible office sector

Serviced office space, flex space and co-working solutions have been popular options for small start-ups and large enterprise clients alike. The relatively short contractual commitments, ease of use and engagement, plug-and-play space, networking opportunities and flexible seat count have been welcome benefits to many companies. The pandemic will increase the desire for flexible office terms and sizes. The providers of such space that can provide flexible office solutions coupled with an environment where workers feel comfortably distanced and reasonably shielded from the spread of germs will likely enjoy high demand for their product and healthy balance sheets.

That said, the pandemic has hit the flex sector hard, with the very flexibility that attracted clients in the first place allowing occupiers to reduce their occupation at short notice. Some operators suffered cancellations of up to half their customers, with pricing continuing to drop for the remainder in order to try and prevent further terminations.

The desire for flexibility is also evident elsewhere in the real estate sector, for example in the rising popularity of “modular” office building designs, with traditional office layouts are replaced by semi-modular and/or modular designs. This is seen by many owners as a potential solution to the challenge of more frequent changes in the type and amount of space needed by an occupier community whose needs will be more variable, and unpredictable, over the coming years.

Flexible office sector

Serviced office space, flex space and co-working solutions have been popular options for small start-ups and large enterprise clients alike. The relatively short contractual commitments, ease of use and engagement, plug-and-play space, networking opportunities and flexible seat count have been welcome benefits to many companies. The pandemic will increase the desire for flexible office terms and sizes. The providers of such space that can provide flexible office solutions coupled with an environment where workers feel comfortably distanced and reasonably shielded from the spread of germs will likely enjoy high demand for their product and healthy balance sheets.

That said, the pandemic has hit the flex sector hard, with the very flexibility that attracted clients in the first place allowing occupiers to reduce their occupation at short notice. Some operators suffered cancellations of up to half their customers, with pricing continuing to drop for the remainder in order to try and prevent further terminations.

The desire for flexibility is also evident elsewhere in the real estate sector, for example in the rising popularity of “modular” office building designs, with traditional office layouts are replaced by semi-modular and/or modular designs. This is seen by many owners as a potential solution to the challenge of more frequent changes in the type and amount of space needed by an occupier community whose needs will be more variable, and unpredictable, over the coming years.

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Footnotes

2. Buildings are generally divided into two categories: Type ‘A’ – usually a built-up area above the ground floor, relatively large square meters, full systems of central air conditioning and several elevators, high level of internal finishing in public areas, a professional management company that maintains the building, rental prices are requested for new offices that include standard finish of 3,000 NIS per gross square meter; and type ‘B’ – smaller buildings with an area built above ground with small to medium square meters, good/reasonable level of internal finishing in the public areas, inferior buildings to Class A buildings, suitable for tenants looking for a less expensive alternative.

The Locations are divided into class ‘A’ – mainly the Tel Aviv area, the center area of Israel and the highest area in demand and prices, also considered to be about 50% of all the transactions of this nature; and class ‘B’ – the Tel Aviv surrounding area, a bit more peripheral, which attract lower prices in comparison the class A.

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