Law, accounting firms move to Tel Aviv's new towers

Azrieli Sarona Tower Photo: Viv Point

Despite the proliferation of high-rise office projects in Tel Aviv and Ramat Gan, rents are rising to new records.

"Globes" last week reported that the Gornitzky & Co. law firm was negotiating with Vitania Ltd. (TASE:VTNA.B1) and Delek Motors for the purchase of 8,000 square meters of office space in the Delek Motors tower that the latter two companies were building on the intersection of La Guardia and Heharash Streets in southern Tel Aviv.

The price was estimated at NIS 10,500 per square meter in shell condition, making a total price of NIS 84 million for the space. A source involved in the deal said that with the addition of finishing and the purchase of parking places, the total price was likely to exceed NIS 100 million. Gornitzky & Co. is currently located on several floors of an old building at 45 Rothschild Boulevard in the Tel Aviv business center.

The trend among large law and accounting firms towards leaving space in existing buildings for space in new high-rises is gaining momentum. The Herzog Fox & Neeman firm only recently reported that it was likely to leave its old home in Asia House, despite its location opposite the Tel Aviv Courthouse, and to move to 15,000 square meters that it had rented early this year in an office tower being constructed by Rubinstein on the Yitzhak Sadeh site. Fischer Behar Chen Well Orion & Co. is expected to leave the Daniel Frisch tower for the new Azrieli Town office tower under construction by Azrieli Group Ltd. (TASE: AZRG) on the Clalit Health Services site on Menachem Begin Road, in which the firm has rented 10,000 square meters. Accounting firm PwC Israel (Kesselman & Kesselman) rented no less than 16,000 square meters on 12 floors in the Azrieli Town tower, and is scheduled to leave its offices on Hamered Street near the sea.  Pearl Cohen Zedek Latzer Baratz law firm rented two floors with 4,700 square meters in Azrieli Sarona tower. 

The trend is clear: large firms are seeking to terminate their leases in old buildings (even buildings that still have a good reputation and a good location, and even when the firms moved to their current premises in the recent past). Some of them are moving to new space that they have purchased. The first two deals in this trend were the 2014 purchase of 21 of 50 floors in the Midtown office tower being constructed by Israel Canada ITR) Ltd. (TASE:ISCN), Electra Ltd. (TASE: ELTR), and Eurocom Real Estate on Menachem Begin Road for NIS 342 million by the Ernst & Young (Israel) Ltd. (Kost, Forer, Gabbay & Kassierer) accounting firm, which is scheduled to leave its offices on Aminadav Street. This deal also included 500 parking spaces.

The second deal was by the Amit, Pollak, Matalon law firm, which left the Nitsba tower at the corner of Yitzhak Sadeh and Hamasger Streets and moved to the CU project in Ramat Hahayal, after joining a buyers' group formed by Tidhar Group and Sufrin Group for the purpose of acquiring a lot from the Mediterranean Car Agency for NIS 150 million.

"My father, a real estate man, always said that the Koresh family had never paid rent," says Amit, Pollak, Matalon managing partner Advocate Eldad Koresh, explaining how he persuaded his partners to buy offices instead of renting.

"We sat in the Nitsba Tower, and realized that work on the Greater Tel Aviv light rail was going to create total chaos, and it was decided to get away from the mess. Eventually, a week before they demolished the bridge at the Maariv Building, we moved to the new offices, and we were the first tenant in the building. The location is such that it's easier to get to Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) in Ramat Gan or to Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) in Petah Tikva from Ramat Hahayal than from central Tel Aviv."

Koresh says that there were also financial considerations: "The differences in price were significant. When we bought the offices in Ramat Hahayal, the price was around NIS 9,000 per square meter in shell condition, compared with NIS 13,000 in the city center. Today, the price is already NIS 15,000 per square meter in Ramat Hahayal and NIS 17,000 per square meter in central Tel Aviv. The price enabled to also buy 100 parking spaces, which makes is easier for guests to visit us, while such a thing is impossible in the city center. It also enabled to take a large space of 3,300 square meters on three floors. That means that we can expand in the future, and also build a fitness room for employees, a roof balcony with a bar, and we'll be able to throw away our old furniture and buy new. Another consideration was the right to put our name on the building, which gives us visibility from Raul Wallenberg Street. Six months ago, we took another quarter of a floor, and we're negotiating to buy more space in an adjacent building. When we bought, we got an extra floor and a quarter that we thought we would lease, but as time passed, the amount of space we thought about leasing got smaller and smaller. When we moved to the new offices, we had 12 extra rooms. Today, we haven't got a single available square meter, because we've expanded a lot.

"In contrast to many other firms, we made a deal by founding a company owned by all the partners in the office: both the equity partners and the profit partners. The company bought the offices, and in effect, the lawyers now have an income-producing property with an excellent tenant.

"As far as improving the space we're talking about, even if there's an increase or a decrease, it's of no interest. I lease offices that I bought for my business. I paid rent in the Nitsba Tower for 13 years. Had I bought the property, I would have already been its owner now. When I left Nitsba, however, I didn't get a shekel. I even had to spend money to whitewash and arrange the property in order to return it to Nitsba Holdings Ltd. (TASE: NTBA). People who rent from Azrieli have long-term leases. For that money, it's better to buy."

Man Properties CEO Jackie Mukmel says, "Because of the large volume of construction, companies like law and accounting firms are trying to find opportunities to concentrate the entire firm in one place on the good terms now available. Such firms want to rent large amounts of space from private developers in high-rises with a single owner, not from buyers groups with many owners having space to rent. It's hard to find a large space held by many small owners, and to reach agreements on a uniform lease.

"When a purchase is involved, on the other hand, there are firms that made deals with a buyers group, and then they turn the purchase into an income-producing property, as Ernst & Young and Amit, Pollak, Matalon did. Actually, instead of distributing a dividend, they give all the partners an option to buy their own property in order to provide them with the future return.

"The conclusion is that the large firms' money is looking for investment instruments. Most of the firms regard their old property as a poor alternative to a new property that is suitable to their current and future needs. The areas vacated in the old buildings will be up for rent, which should remind us that when large deals for new offices take place, it's not that the supply is small, because the companies entering the new high-rises are leaving old space, which enters the market as supply. The offices in these buildings will have to be upgraded and adapted to something new, but in the framework of a change in the urban building plan."

On the other hand, Inter Israel Real Estate Consultants partner Yoram Blumenthal, who was responsible for the deal in which Herzog Fox & Neeman rented offices in the Rubinstein Tower now under construction, believes that the purchase deals do not indicate a trend: "It's true that there are large firms that have decided to buy space, but on the other hand, both PwC Israel and Fischer Behar Chen Well Orion & Co., which rented large spaces in the Azrieli Town project, are switching from ownership to renting, because they currently occupy space that they own.

"When a large firm buys space, it's usually a large partnership deal. This is a complicated situation. The increase in the number of partners is frequently not organic; it results from mergers with smaller firms, in which case the question arises of which partners will be part of the deal, and this is liable to create strain. Renting, on the other hand, and certainly in the high-rises now being built, facilitates a lot of dynamics, and these firms' needs change from time to time."

Where the space being vacated in the old buildings is concerned, Blumenthal believes that upgrading will be necessary, but their most prominent advantage is their location. "Asia House, for example, which Herzog Fox & Neeman is expected to leave, was built in 1976, changed hands several times, and is now owned by Alfred Akirov, who is initiating a new urban building plan for hotels with an addition of 14 storeys. The building's location is excellent, and thorough work on it can make it an excellent building. We see that the courthouses are becoming a less significant factor in the real estate preferences of law firms."

Market saturation? Man Properties: Rents in the offices market continued to climb in the second quarter

Even though construction of quite a few towers in high-demand parts of the Greater Tel Aviv are has been completed, rents are still setting new records. A market survey conducted by Man Properties at the end of the second quarter of 2017 shows that prices continued to rise slightly, combined with an increase in occupancy of offices in Ramat Gan (the Diamond Exchange area) and Tel Aviv.

According to the survey, the gap between the Ramat Gan Diamond Exchange area and the towers in Tel Aviv continues to narrow, mainly as a result of the work on opening a new exit from the railway station and progress on work on the light rail in the area. Mukmel, who has been predicting a surplus in office space in recent years, says that occupancy in Herzliya fell to an average of 90% in the second quarter, compared with 92% in the first quarter. On the other hand, Mukmel says, occupancy in the Ramat Gan Diamond Exchange area rose from 89% in the first quarter to 92% in the second quarter. Surprisingly, the leader in occupancy is Caesarea with 96% average occupancy for office space.

Where the commercial sector is concerned, despite the burgeoning competition and growth in ecommerce, Man Properties emphasizes that the leading fashion groups are continuing their expansion. According to Mukmel, the acquisition of the Whole Foods chain by Amazon shows the latter's faith in retail trade in city centers.

At the same time, the market for industrial and logistics space is still red hot, with prices soaring, "given the growing need for modern distribution centers." Man Properties notes that because this market features long-term deals, the rise in prices is reflected mainly in land prices along the main traffic arteries. Average monthly rent in the logistics and storage sector is NIS 52 per square meter in Tel Aviv, NIS 50 per square meter in Ramat Gan and Herzliya, NIS 37 per square meter in Haifa, and NIS 36 per square meter in Jerusalem. Prices are similar in the industrial sector: the average monthly rent is NIS 53 per square meter in Tel Aviv, NIS 52 per square meter in Ramat Gan, NIS 50 per square meter in Herzliya, and NIS 40 per square meter in Jerusalem, Haifa and Petah Tikva.

Published by Globes [online], Israel Business News - www.globes-online.com - on July 20, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Azrieli Sarona Tower Photo: Viv Point
Azrieli Sarona Tower Photo: Viv Point
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