A view of the Tel Aviv and Bnei Brak skyline, showing a number of cranes and office buildings, July 22, 2020. (Raymond Crystal)

Commercial Real Estate in ‘Coronavirus Shock,’ Analysts Say (VIDEO REPORT)

Israeli businesses leave malls, stores and offices in droves, as pandemic accelerates shift to remote work

The face of commercial real estate around the globe is in a state of “coronavirus shock” that could bring about radical changes, analysts are saying.

In Israel, tenants are leaving malls, stores and offices in droves and freeing up hundreds of thousands of square feet of commercial space, according to a new report by CBRE, the world’s largest commercial real estate services company.

The retail sector has been especially hard hit by the pandemic, with rents in Tel Aviv on average dropping by 10% since last year. Rent prices for offices in the city meanwhile declined by 6% in the second quarter of 2020.

“Today, commercial real estate is in a state of coronavirus shock,” CBRE Israel Chairman Jacky Mukmel told The Media Line, adding that the havoc wrought by the pandemic on the real estate market has only just begun to emerge.

Jacky Mukmel, chairman of CBRE Israel, looks out at the view of Bnei Brak, July 22, 2020. (Raymond Crystal)

The principal Israeli city that saw businesses shutting down and leaving their retail properties was Tel Aviv, whose occupancy rate slipped to 94% from a previous high of 97%. This decrease is equivalent to hundreds of stores closing since the beginning of the pandemic and is counterbalanced by a move towards online shopping.

Today, commercial real estate is in a state of coronavirus shock

Outside of Tel Aviv, other Israeli cities have also seen a slowdown in the commercial real estate sector, albeit less pronounced. In Ramat Gan, which is adjacent to Tel Aviv, office prices fell by 5% since 2020’s first quarter while retail decreased by 7%. Jerusalem only saw a decrease of 1% in prices for commercial space since the beginning of the year.

Cities in the periphery meanwhile saw almost no change in prices, though Mukmel expects that to change in the coming months.

“Both services companies and startups are suffering from a lack of liquidity and for this reason they are slowly leaving their commitments,” he said. “Either they are departing from their properties or large companies are reducing the amount of office space they use because of remote work or streamlining.”

Mukmel emphasized that these trends are not limited to Israel but are global in nature.

Cash-strapped due to a lack of consumers or forced to shut down under COVID-19 regulations, many businesses are looking at real estate in a whole new light.

Co-working spaces and office buildings are losing ground as a growing number people work from home to avoid spreading the virus. For instance, WeWork’s shared workspace model has suffered a significant blow from the crisis, according to Standard & Poor’s Maalot agency.

A view of the Tel Aviv and Bnei Brak skyline, showing a number of cranes and office buildings, July 22, 2020. (Raymond Crystal)

Another example is LivePerson, a customer engagement firm that employs some 1,300 people internationally. A few weeks ago, the company announced that it would be moving its entire workforce out of office in order to adopt a work from home model. In an interview with Israeli news site Calcalist, LivePerson CEO Robert LoCascio referred to offices as a thing of the past and an unnecessary expense.

“The coronavirus has accelerated work habits that didn’t exist beforehand or that only existed on a partial basis in the world of hi-tech,” Nadav Berkovich, a real estate analyst at IBI Investment House, affirmed to The Media Line, adding that COVID-19 has brought about “major changes.”

“Real estate was maybe one of the hottest market sectors beforehand, with very high demand and rental prices constantly rising,” he said. “Now we’ve done a complete 180. There’s fear of a recession, high unemployment and other changes affecting the market.”

Restaurants and offices line Tel Aviv’s bustling Rothschild Boulevard. (Wikimedia Commons)

The global shift to remote work could further spell trouble for office building construction, which has boomed in recent years across central Israel. In fact, Mukmel of CBRE notes that the country has a big surplus of office space available.

“I’d say that 80% of the cranes that we see in central Israel are for construction of office buildings,” he said.

Both services companies and startups are suffering from a lack of liquidity and for this reason they are slowly leaving their commitments. Either they are departing from their properties or large companies are reducing the amount of office space they use because of remote work or streamlining

On the residential side of the real estate spectrum, the pandemic does not appear to have had any effect so far. Mukmel and Berkovich believe this is due to natural demand and as a result of ongoing interest from foreign buyers who continue to lap up properties in Israel.

“One positive thing that you can find in all this is that Israel’s population is projected to double by 2040,” Mukmel related. “This might mean that we will be very strong in our coronavirus exit because at the end of the day, we have industries that are [doing well] and working hands.”

Nevertheless, he added, “we do need to prepare for the end of the pandemic, which will change things as we know it.”

Still, the damage done to the commercial real estate market echoes the overall health of Israel’s economy, real estate experts believe.

Ultimately, as Israel’s unemployment rates reach record levels – with over 21% of currently out of work – the true impact of the pandemic will only be revealed further down the road.

“Real estate is a like a reflection of the Israeli economy,” Berkovich of IBI Investment House said. “If we look at who is renting commercial real estate, it’s banks, insurance companies, high-tech firms and others. If the economy is heading towards a slowdown or recession then that directly impacts real estate companies.”

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