Office Space Weakness May Spur Housing Development, Lower Prices

A downturn in parts of the office market could benefit prospective homebuyers in Israel, as landowners struggling to justify office building projects may pivot to residential development. This shift, facilitated by planning authorities, has the potential to add over 20,000 housing units to the market. Approximately 7,000 units are already under review in ten plans, with an additional fifteen sites in preliminary planning stages. Some projects will integrate housing alongside offices and retail.

This significant housing reserve's realization depends on future approvals and construction progress. For instance, in Rishon LeZion's "Aluf" complex, a plan to incorporate 113 small apartments on a site previously zoned for 9,000 square meters of commerce and employment was approved for deposit in 2024. The plan requires retaining half of the employment rights while adding residential units, offering a compromise that supports business while enabling developers to fund projects through apartment sales.

In Glilot, a separate planning track involves Big, which seeks to convert approximately 46,000 square meters of office space into sheltered housing for the elderly, potentially freeing up existing homes. In Givat Shmuel, a plan for around 400 apartments is advancing on land previously approved for 52,000 square meters of offices, featuring residential towers above commercial and office floors, with half the apartments designed to be small.

The distinction between rezoning land and converting existing buildings is crucial. Rezoning allows for purpose-built residential design, while converting existing offices involves costly and complex adaptations. The office market itself is bifurcating: high-grade office buildings in Tel Aviv show near-full occupancy, while second-tier buildings in Herzliya Pituah are experiencing declining occupancy and rental rates. Factors like location, building quality, and proximity to public transport influence demand, leading to varied outcomes even within the same city.

The tech sector's evolving needs, with some software companies downsizing and cybersecurity firms expanding, coupled with increased employee productivity potentially driven by AI, mean that office space demand is becoming more complex. This could lead to situations where new buildings fill up while older ones lose tenants. The influx of new housing units, potentially around 4,000 per year if the 20,000-unit potential is realized over five years, could increase buyer options and exert downward pressure on prices, especially in competitive local markets. However, the actual impact on prices will depend on the pace of development and sales, as well as broader economic factors like interest rates.