New Office Towers Sacrifice Workspace for Amenities

Modern office towers are increasingly designed not just for workspaces, but also to include amenities like lobbies, restaurants, gyms, lounges, and shared areas, aiming to attract tenants. However, these additions come at the cost of usable space, as the ratio of gross to net area in office buildings has increased significantly. While this ratio was around 15% in the 1990s, it now stands at approximately 25%-27%, meaning tenants pay for a larger proportion of shared or unusable space.

This trend is occurring amidst a high supply of office spaces and growing competition for tenants, prompting developers to differentiate through quality, services, and shared facilities. The gross-to-net ratio has become a critical factor in building design and tenant negotiations. The CEO of Avison Young Israel, CEO of Avison Young Israel, explains that the "Core Factor" (gross-to-net ratio) reflects building efficiency, with the difference primarily due to shared areas like lobbies, stairwells, elevator shafts, and utility rooms, allocated proportionally to each tenant. A higher core factor, typically between 1.12-1.35 in Israel, indicates more space dedicated to common areas, meaning tenants pay for more than their actual usable space. High-end buildings often have higher core factors due to luxurious lobbies and advanced infrastructure.

Itai Sheferan, an economic consultant, notes that new Israeli buildings feature extensive public spaces. He emphasizes that the gross-to-net ratio is a key consideration for companies selecting office locations, especially those focused on monthly rent costs. This ratio also distinguishes Class A from Class B buildings. Yaniv Lotringer, CEO of JLL Israel, observes that in older buildings, the gross-to-net load is around 20%-25%, while in new towers, it approaches 30%, sometimes reaching 35% in buildings like ToHa 2. However, he cautions that a higher ratio doesn't always mean poorer design, as it can reflect better amenities and infrastructure. He also points out the lack of a uniform measurement standard in Israel for calculating gross and net areas, affecting comparisons and the calculation of management fees.

Architect Adi Roobnanko highlights changes in office tower design, particularly post-COVID, leading to a greater variety of in-office spaces. The focus has shifted from efficient division into individual workstations to incorporating shared meeting rooms, collaborative work areas, and diverse dining spaces. This influences floor size and layout, allowing for deeper floor plans. Building height also impacts the ratio, as taller buildings require larger core areas for elevators, stairwells, and safety systems, reducing usable office space. Mixed-use buildings, combining residential and office spaces, further increase core area requirements.

Tzachi Sofrin, Chairman of Sofrin Group, states that tenants generally prefer lower gross-to-net ratios for economic reasons. However, evolving workplace expectations, where offices serve as a company's representation, have increased demand for more spacious and pleasant environments compared to the denser, more utilitarian offices of the past. Sofrin also notes that regulatory requirements for waste disposal, loading areas, fire safety, and evacuation routes contribute to larger common spaces. The division of floors into smaller offices also necessitates more corridors, potentially increasing the gross-to-net ratio.

Alon Volner, a real estate partner, explains that while larger shared spaces increase the gross-to-net ratio, they also enhance a building's attractiveness. This is particularly relevant in competitive markets outside of Tel Aviv, where amenities like gyms and restaurants can attract tenants despite a higher ratio. Hybrid work models and the trend of large tenants occupying entire floors can make shared spaces more efficient for those tenants. However, Volner also notes that excessively large elevator shafts or stairwells that don't offer tenant benefits can make a building less attractive, even with a high gross-to-net ratio.