Israel’s high-tech sector has been experiencing a downturn since 2022, due to a series of setbacks that have hit it and the economy: interest rates have risen to unprecedented levels in the fight against inflation, judicial reform has driven away foreign investors, and war in the Gaza Strip broke out in late 2023.
During this time, technology companies, even the largest, have made significant layoffs and cuts, including reducing office space, after aggressively expanding their real estate presence in 2020-2021. However, these trends were not reflected in the reports of commercial real estate companies, which continued to report increasing revenues and rising rents on new contracts.
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Amot Atrium.
(Photo: Orel Cohen)
All explained the mystery by saying that the listed real estate companies were the largest companies in their industry, that their assets were prestigious assets in high-demand centers, and that their tenants were particularly strong.
But today, something may have changed and a first crack has appeared. Real estate company Amot, one of the largest in the country, released its reports for the second quarter and the first half of 2024. They show that new contracts for office rentals signed in the first half of the year showed a decline in the average price – for the first time since 2020, when the company began reporting new contracts by sector.
Although this is an almost negligible 1% drop to an average price of NIS 78 per square meter per month, the symbolism of this decline cannot be ignored. If this is the case for the big Amot, it is reasonable to expect larger declines among smaller and non-public players operating in areas outside of Greater Tel Aviv.
Amot, controlled by Alony Hetz (51%), who in turn is controlled by Nathan Hetz, owns 113 income-generating properties valued at NIS 16.3 billion. Its core business is the office sector. Office properties account for 49% of the asset portfolio by value and generated 47% of net operating income (NOI) in the second quarter.
Most of its office properties are concentrated in the greater Tel Aviv area, including the ToHa Tower, the Atrium Tower in the City Ramat Gan complex and the Amot Investments Tower, in central locations and close to important transport routes and therefore also enjoy high occupancy and demand. But even these properties are not immune to falling rents.
In the first half of the year, Amot signed 121 new office leases. This includes new tenants, lease renewals and the exercise of lease extension options. These contracts represent 52% of the contracts signed this year. As mentioned above, these contracts recorded a 1% decrease in the average price per square meter per month.
Amot did not provide data for the second quarter, only for the first six months. However, since there was a 3% increase in the first quarter, the decline in the second quarter was more pronounced.
In the conference call with investors to discuss the published reports, CEO Shimon Abudraham explained the decline by saying, “There is an increase in requests to continue renting the property as it is, without investing in its renovation. There is no investment component, and therefore the total rental price will usually be lower.” This is a turnaround from the heady days of the high-tech industry in 2020, when companies often used lease extensions to expand or renovate their offices. However, Abudraham stressed that the profitability of these contracts will be higher for the company because Amot does not have to carry out any work on the properties.
These data are largely a natural continuation of what has been happening in Israel in recent years. Amot has long warned about the impact of the business environment on its results, stressing in its quarterly report that “the slowdown in the pace of investment in Israeli high technology, which is the main engine of the economy, continues to have a negative impact on market sentiment.”
In the conference call with investors, Abudraham said: “We are seeing a general risk aversion, delays in investments and hiring, a decline in the opening of new premises and in demand for growth space. This is particularly true for buildings that are being occupied for the first time.” One example of this is the company’s office campus in Holon, which it is having difficulty filling. According to him, “war, political unrest and expensive money are leading to a poor business sentiment and slowing the flow of new blood into real estate.”
While rental rates have declined for the first time, Amot’s capitalization rates have been rising for three years, and the weighted average capitalization rate arising from its income-generating properties has stabilized at 6.45% at the end of the half year, compared to 6.3% at the end of 2023 and 6.08% in December 2021.
