by Leslie Braunstein in Urban Land Online, March 2013 – Tel Aviv—Israel’s seaside metropolis—has emerged as a global hub of technological innovation. Home to thousands of homegrown startups as well as outposts of American giants such as Google and Microsoft, Tel Aviv’s technology corridor, dubbed the “Silicon Wadi” (employing the Arabic word for valley), is ranked just behind California’s Silicon Valley in worldwide importance.
Established in 1909, Tel Aviv attracts millions of international visitors each year who come for its history, beaches, and thriving 24-hour culture. Many visit the “White City,” a collection of more than 4,000 Bauhaus-style buildings developed by German Jews fleeing the Nazi regime in the 1930s and named a UNESCO World Cultural Heritage Site in 2003. Efforts are now underway to renovate and preserve more than 1,500 of these structures, says Israeli-born architect Esther Simon of Washington, D.C. Over the last three decades, she notes, the city also has restored Neve Tzedek, the first Jewish neighborhood built outside of Jaffa, the ancient port city that was incorporated into the municipality of Tel Aviv in 1950. After years of neglect, it is now a trendy residential area with a vibrant arts and café scene.
These and other older Tel Aviv neighborhoods contrast sharply with new high-rise construction. The last two decades have seen the planning and construction of dozens of skyscrapers, from 30 to 75 floors high, reflecting scarcity of land and high demand for both housing and commercial space in Tel Aviv.
In its commercial real estate market, office vacancy rates are less than 2 percent, compared with an average of about 10 percent in the rest of the country, says Daniel Baraz, cofounder of the Tel Aviv–based research firm Bregman-Baraz Real Estate (B-BRE). About 5.9 million square feet (550,000 sq m) of new office space is in the pipeline for delivery over the next five years, he notes, and that represents about 30 percent of the current office building stock.
Rents in new Tel Aviv office buildings range from about NIS (New Israeli Shekels) 70 to 120 per square meter per month, equivalent to about US$21 to US$36 per square foot per year. Tel Aviv’s commercial property prices are about 50 percent higher than the Israeli average. Office capitalization rates are higher than the country average, however, unlike other world metropolitan centers such as New York or London. Also unlike the U.S. office market, Tel Aviv’s office cap rate has remained relatively stable over the last three years at just over 7 percent. In comparison, according to Eileen Marrinan, the research director for Grosvenor Americas, overall U.S. office cap rates peaked in 2009 at 8 percent, declining to just over 7 percent in 2012. U.S. central business district cap rates, more comparable to those of Tel Aviv, declined from 8.2 percent to just 6 percent during this same time period, she adds.
More than half of the new buildings are being developed by publicly listed companies, Baraz says. Some new office development is created by “acquisition groups.” In this model, a developer buys an option for a lot and then organizes a group of companies or individuals, each of whom prepurchases a floor, a half-floor, or more than one floor of the new building.
One of the most impressive office developments under construction is the 1.3 million-square-foot (120,774 sq m) Azrieli Center Sarona, with a total estimated development cost exceeding NIS 1.5 billion (US$405 million). The Azrieli Group, which built the landmark Azrieli Towers in Tel Aviv, is an Israeli publicly listed company. With so much Tel Aviv office development in the pipeline, absorption will depend on future macroeconomic conditions, notes B-BRE cofounder Nirit Bregman.
Meier-on-Rothschild under construction.In addition to the healthy office market, Tel Aviv’s residential real estate market is booming with new construction. One striking example is Meier-on-Rothschild, a 42-story tower in the heart of the city’s commercial, financial, and cultural center, designed by Pritzker Prize winner Richard Meier and developed by Tel Aviv–based Berggruen Residential. Scheduled for completion in 2014, it will be the tallest residential tower in the city. Its 147 ultra-luxury apartments average 8,450 square feet (785 sq m) and are priced from US$1,100 per square foot (NIS 44,122 per sq m). Buyers reportedly include the great-grandson of Baron Edmond de Rothschild, namesake of the Tel Aviv boulevard. The building’s two-story penthouse with 16,145 square feet (1,500 sq m) of living space) and two spacious balconies is priced at a whopping NIS 170 million (US$50 million).
A similar example is Sea One, a 23-story beachside tower that combines a five-star hotel, scheduled to open in May 2013, with luxury apartments that are 95 percent presold. Prices for the remaining apartments begin at about NIS 100,000 per square meter (US$2,500 per sq ft), says Shira Oren-Nahmias of the development firm Oranim Projects Ltd., located just north of Tel Aviv in Herzliya.
These and other ultra-modern residences under construction in and around Tel Aviv appeal to both wealthy Israeli citizens and foreigners—although, according to anecdotal reports, inquiries from foreign buyers dropped sharply after the November 2012 attacks from Gaza. The incremental cost of providing a fortified “safe room” in every new apartment represents an almost negligible factor in the sky-high pricing for these dwellings. The real price drivers, say local housing experts, include record-low interest rates, high demand, taxes, scarce land, and the difficulty of carrying out almost any type of new development in Tel Aviv’s urban neighborhoods. Add to those factors the price of top-of-the-line design, materials, systems, and finishes.
Soaring housing prices may not be an obstacle for the international elite, but these prices are adding angst to the already stressed lives of many middle-class Israelis, especially young technology workers and entrepreneurs who want to live in Tel Aviv’s dynamic urban environment. “Housing prices have increased so dramatically that we now have a housing crisis,” says Efrat Tolkowsky, head of real estate studies at the Interdisciplinary Center (IDC), a private university in Herzliya. “The average apartment costs over 120 times the typical buyer’s monthly salary, compared to about 60 to 70 times monthly salary in the U.S. and OECD [Organization for Economic Cooperation and Development] countries.”
While for-sale multifamily apartments—the predominant housing type—continue to increase in price, Tel Aviv does not offer the type of housing now being built throughout the major markets of North America: multifamily rental. Virtually all housing in Israel’s cities, including Tel Aviv, is in multifamily buildings, with each apartment or floor under separate ownership. About 70 percent of Israelis own their homes, Tolkowsky notes, while others rent homes from individual owners who may be investors. Renters cannot count on staying in their apartments for long periods, and Israel’s zoning currently does not cover multifamily rental development.
Development financing in Israel works against the concept of speculative rental housing, Tolkowsky says. When a building is planned, individual units are presold to buyers, who typically take out mortgages to buy their apartments. The purchase contract is a recourse obligation; buyers are protected by a special type of insurance from a bank that provides some of the project financing. A single bank aggregates apartment purchasers’ payments and makes disbursements to the developer as construction progresses. The bank also makes construction loans, but these loans typically cover only about 30 percent of development costs.
Urban regeneration is especially difficult, says Tolkowsky, due to the fragmented structure of land and property ownership. “If you want to redevelop an existing building, you have to get 100 percent of the owners to agree to your plan, and there is always someone who will not cooperate,” she says.
This problem, of course, doesn’t exist on greenfields. But the Israeli government controls more than 90 percent of the country’s undeveloped land, and relinquishes this limited resource infrequently. Following a spate of protests about housing costs and other issues, the Israeli Land Authority recently started auctioning land parcels to developers who promise to build product that will remain rental for 25 years. The government also can authorize development of for-sale homes on previously undeveloped land. Currently, a number of upscale neighborhoods are under development north of the Yarkon River on the site of a decommissioned military air base. Tel Aviv’s master plan calls for adding 50,000 residential units by 2020, mostly in this northern area.
In 2005, the Israeli government instituted Tama (an acronym for National Outline Plan) 38, and has amended it since then. Under this policy, a developer—in exchange for making structural and other improvements—is allowed to build 2.5 additional floors above an existing pre-1980 residential building. The developer needs approval only from two-thirds of the residents to proceed, as opposed to the 100 percent occupant approval needed to demolish and rebuild. While the renovations must improve buildings’ resistance to earthquakes, they also can include a variety of other upgrades, including the addition of safe rooms.
“Tama 38 provides a win-win situation for both developers and residents,” says Elchanan Rosenheim, founder of the real estate investment firm Profimex, based in Ra’anana. Rosenheim, whose company invests in U.S. and other foreign real estate for Israeli investors, believes the idea of homeownership is ingrained in Israeli culture, with parents typically buying apartments for their grown children. He comments that young, single workers would probably love to live in the type of amenity-rich one- or two-bedroom apartments similar to the multifamily asset class so popular in the United States. “For this, we would need to see a change in the acceptance of this type of living environment, a willingness of the institutional investors to invest in this asset class in Israel, and a combined effort of our government and local municipalities to establish multifamily rental housing,” he says.
So what is stopping U.S. multifamily developers from setting up shop in Tel Aviv along with American technology firms? Plenty, say the experts whose feet are on Israeli ground. Fragmented property ownership, inflexible zoning, strict bank lending regulations, and a lack of transparency in the real estate market combine to create major barriers to market entry for foreign developers.
Most large developments in Tel Aviv involve both the public and private sectors. One example is Tel Aviv’s first lifestyle center, called Sarona, now under development on the 47-acre (19 ha) site of a former German Templer colony. The Templers (not to be confused with the Crusader-era Templars) were a German Protestant sect that aimed to rebuild the Temple in Jerusalem to promote the second coming of Christ. In the mid-1800s, a Templer group acquired agricultural land near the Yarkon River from a Greek monastery and established a colony that became a model for future Israeli agricultural settlements. For the last six decades, these European-style structures were used as office space by the Israeli government and defense forces. Saved from proposed demolition by preservationists, 37 Templer buildings are now being rehabilitated and incorporated into a parklike retail, educational, and entertainment center inspired by the Grove in Los Angeles. Surrounding the park, tens of thousands of square meters of mixed-use space are planned, including the Azrieli Center.
Another ambitious development is planned for Tel Aviv’s old commercial district, on the site of the former Shuk Sitonai wholesale food market: Gindi Tel Aviv, named for the Gindi Group, master developer of the 592,000-square-foot (55,000 sq m) site owned by the city of Tel Aviv. The developer has an 89-year ground lease with a possible extension. Plans call for ten 14-story residential towers, each with its first floor elevated 26 feet (8 m) above street level, facing a spacious neighborhood park. The complex is planned to include a school, nine kindergarten and daycare facilities, a private playground, a health club with several indoor swimming pools, a gym, a museum, shops, restaurants, and cafés.
In Tel Aviv, government land control does not always work in favor of developers. The historic Tel Aviv Port Compound, for example, was shut down by the government in 1965, the year by which most shipping business had shifted to the more modern Port of Ashdod, and eventually the compound became a crime-ridden open-air market. In recent years, the joint municipal and governmental corporation that owns the port compound examined a number of high-density urban regeneration proposals, but decided instead to transform the area into a public recreational destination. Completed in 2008, the renovated port area now has more than 100 restaurants, boutiques, and specialty shops operating in former warehouses. The project’s key attraction is a 150,000-square-foot (14,000 sq m) wooden boardwalk with an undulating shape inspired by sand dunes and dotted with shaded seating areas, play areas, and public art. This promenade is now a popular weekend destination.
To ameliorate the traffic congestion caused by Tel Aviv’s ever-growing built environment, business activity, and population, a long-planned light-rail system is now in preconstruction. The city planned a subway system in the 1960s but abandoned the idea after opening just one station. In 2000, the focus shifted to light rail with approval of the 14-mile (22 km) Red Line running from Bat Yam south of Tel Aviv through the city center and eastward to Petach Tikvah, a municipality in Israel’s Center District. Although this first phase of a planned multiline system is scheduled for completion in 2017, many Tel Avivians view the schedule with characteristic skepticism. In other words, they will believe it when they see it.