Defense Tech Replaces High-Tech as Dominant Office Tenant in Israel
Israel's office market is undergoing a significant shift, with defense technology, cybersecurity, and security industries emerging as the primary tenants, supplanting traditional high-tech firms. This trend, detailed in a report by Newmark Natam covering the first half of 2026, indicates a move of the market's center of gravity towards these security-focused sectors.
Traditional tech companies, particularly in software and gaming, are reducing their office footprints and adopting a more cautious approach. In contrast, defense and cyber firms are expanding, often requiring larger spaces and prioritizing in-office work over the hybrid models prevalent in high-tech. This divergence is creating a split in employment centers, with some areas thriving on new demand while others remain dependent on the traditional tech sector.
The report also highlights ongoing pressures on the office market, including the impact of artificial intelligence and corporate efficiency drives leading to layoffs and reduced office space needs. While AI is a factor, it's not the sole cause of job cuts. Simultaneously, a substantial supply of office space, hundreds of thousands of square meters, is available in the Gush Dan area outside Tel Aviv.
Tel Aviv's prime Class A office towers have largely avoided this downturn, maintaining high occupancy rates (98.89% in the first half of 2026) and seeing slight rent increases. Areas like Menachem Begin and Yigal Alon are particularly strong, benefiting from accessibility to public transport and the influx of tech, cyber, and finance companies. However, even in Tel Aviv, lease durations are shortening to around three years, and new office buildings entering the market in the latter half of 2026 may increase competition.
Outside Tel Aviv, the market presents a more varied picture. While overall occupancy in Class A buildings within 30 km of Tel Aviv increased to 88.98%, rents have slightly decreased. Herzliya Pituah, a major tech hub, saw occupancy drop to 90.57% and rents fall, attributed to tech companies downsizing and newer firms seeking more affordable, accessible locations. Conversely, Rehovot and Ness Ziona experienced increased occupancy and stable rents, driven by growth in security, biotech, and pharma. Jerusalem, however, faces challenges, with overall Class A occupancy falling to 82.54%, and Har Hotzvim seeing a sharp decline to 63% due to new supply and large tech firms vacating space, though rents have seen only a minor decrease.
Haifa and the North show stability, with slight rent decreases but steady occupancy. Beersheba and its surroundings are an exception, with both occupancy and average rents rising, led by the Gav-Yam Negev High-Tech Park. Overall, while prime Tel Aviv offices remain nearly full, areas like Herzliya and Har Hotzvim are experiencing declining occupancy and increased competition for tenants, forcing property owners to offer more attractive terms.
