Developers Shun Mixed-Use Towers Amidst Market Challenges

Major Israeli real estate developers are increasingly opting out of incorporating residential units into mixed-use high-rise projects, a trend exemplified by Azrieli Group's decision to forgo 292 planned apartments in its Spiral Tower in Tel Aviv. This move contrasts with earlier ambitions, such as Amot's chairman Netan Hetz stating in 2021 that while residential units could fetch double the price of offices, they deliberately chose an office-only tower. The local office market faces an unprecedented surplus, with the Planning Administration warning of over 180 million square meters of approved office and commercial space. Azrieli's decision is particularly notable given its recent acquisition of construction firm Tzameret Marmon, signaling a strategic entry into the residential sector, a move that deviates from the explicit wishes of its late founder, David Azrieli.

The concept of mixed-use towers, integrating employment, commerce, and residences, was once hailed as a perfect urban vision. However, the Israeli reality proves more complex. The Moshe Aviv Tower in Ramat Gan, an early pioneer of the mixed-use model with 57 office floors topped by 12 luxury residential floors, experienced a "negative premium." A three-room apartment there recently sold for significantly less than comparable units in residential-only towers, indicating that apartment buyers prioritize community and a distinct residential environment.

Developers also face significant engineering and cost challenges. Residential floors require extensive plumbing and bathrooms for each unit, a complex and expensive undertaking when installed above office spaces, potentially leading to leaks and disputes. Additionally, residential units have stricter requirements for natural ventilation and safe rooms (mamad), which differ from the needs of office spaces that rely on sealed facades and central air conditioning.

Legal and management issues further complicate mixed-use developments. Israeli law is not well-adapted to shared living and working spaces within a single building. A recent dispute concerning the Aptown tower in Bat Yam highlighted this, where residential tenants sued the developers over management costs, but the registrar ruled that under property law, they are part of a single shared building with no separate legal standing. This underscores the difficulty of managing a mixed-use tower where residential needs often clash with commercial and employment interests.

Consequently, the model is shifting. Instead of cramming all uses into one structure, developers are moving towards horizontal mixed-use, exemplified by the Elite Tower project, which was initially planned as a single integrated tower but was split into separate residential and office towers. This approach aims to maintain urban dynamics without the congestion of a single, multi-purpose building. The trend also casts doubt on a 2022 law intended to facilitate the conversion of offices to residential use, as city mayors prioritize office-based property taxes.