The domino effect is a term coined in the 1950s by American Secretary of State John Foster Dulles, at the height of the cold war between the US and the Soviet Union. According to Dulles, no state whatsoever, however small or remote, was to be allowed to fall into the hands of the Soviets, otherwise it would be followed by a long series of other states who would embrace Communism, just as domino bricks fall one after the other.

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I was reminded of the domino effect when reading, like many others, the review by the prestigious Economist magazine, according to which Tel Aviv has become the most expensive city in the world, out of 173 cities surveyed. Beyond the fact that following the survey, an endless number of articles, opinion columns, and analyses have already been written, in my opinion, the most interesting angle is not the real estate prices in Tel Aviv and the fact that it has become a very expensive city – a fact that is by no means newsworthy – but rather the domino effect of Tel Aviv's prices on the housing market in Israel.

Just a taste of what is to come: according to my findings, it appears that housing prices in a relatively distant satellite city such as Netanya are currently identical, more or less, to housing prices in Tel Aviv in 2006, just prior to the quantum leap in prices.

In other words: over the past 15 years we have witnessed a domino effect in rising housing prices spreading outwards from Tel Aviv, first to neighboring cities such as Ramat Gan, Givatayim, and Ramat Hasharon, later to the more distant second circle – Herzliya, Ra'anana, Kfar Saba, and Hod Hasharon, and finally to the third circle, such as Netanya, and later, presumably, to the fourth circle, to cities such as Hadera and Or Akiva.

Why does it happen?

The domino effect has 3 main causes: the first is psychological. As soon as housing prices in Tel Aviv break another record, sellers in neighboring cities automatically raise the price of their apartments, too. This phenomenon spreads in circles outside Tel Aviv and Gush Dan.

Second is that apartment buyers unable to find the budget needed for an apartment in Tel Aviv compromise on an apartment in Ramat Gan or Givatayim. Later, when they can't find the budget for those cities either, they compromise on Petah Tikva or Herzliya, and so on.

Third, the phenomenon of a shortage in the housing market and the assumption that prices will continue to rise also causes many buyers to compromise on location. Paradoxically, they pay for that compromise, such as Yavne or Netanya, a price that only two or three years ago they would have paid for an apartment in Herzliya or Hod Hasharon.

So what's the solution?

What can we learn from the domino effect? Well, the fact that Tel Aviv's prices are pulling upwards prices throughout Israel is unfortunately a given that market forces have been determining for years, particularly since 2006. The fact that cities that up until a few years ago were considered peripheral, such as Hadera and Or Akiva in the north or Ashkelon and even Netivot in the south, are falling in line with Tel Aviv, will continue to set the tone in the years to come.

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This circumstance can only be changed through a smart combination of comprehensive urban renewal in all of Tel Aviv's satellite cities, including relatively remote ones, which are already seeing rising prices, and massive land marketing.

It is important to keep in mind that many of the third- and fourth-circle cities, such as Rehovot, Hadera, and Ashkelon, contain significant land reserves, so that in order to stop the domino effect, decision-makers will have to act accordingly.

Eyal Bahari is CEO of the Zim Bahari Real Estate Group

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Reading the newspaper and website headlines merely half a year ago, you could be sure that the office market was history. The headlines screamed about entire towers standing empty and prices falling by dozens of percentage points, including in the most in-demand compounds in Tel Aviv and its satellites.

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The reason was double: on the one hand, the coronavirus pandemic, which caused droves of workers to flee from the offices and work from home; yet at the same time, a surplus of millions of square meters in office space was created – spaces that were at different stages of planning or construction.

Not even one expert predicted that the office market would bounce back. On the contrary, most recommended immediately ceasing the massive construction of new office buildings. Much discussion was held on converting a large part of existing office space to apartments.

Let me begin by saying that the idea of converting office space to apartments is still viable, and in my opinion it is a good and even called-for idea, for many reasons, not least the general lack of housing supply. This is particularly true for compact apartments and especially micro-apartments meant for typical urban populations such as single parents, singles, LGBTs, divorced people, etc.

Full capacity

With Israel's emergence from the third lockdown, at the end of last March, a phenomenon that none of the experts foresaw began to steadily gain ground. Despite the coronavirus effect and the surplus in office space, offices slowly began to fill up. Prices in most compounds returned to their pre-pandemic levels.

The revival included full-blown luxury compounds, such as those along Begin Road and Rothschild Boulevard in Tel Aviv, where rent prices soared again to NIS100-120 per sq.m.; the Diamond Exchange compound in Ramat Gan, where they again crossed the NIS90 per sq.m. threshold; Herzliya Pituach, Ra'anana, and in-demand compounds in the Tel Aviv metropolitan area, from the center of Bat Yam to the Kannot Industrial Park – and the list goes on.

The only compounds that have not yet returned to their original price levels are the BBC compound in Bnei Brak and Ramat HaHayal in Tel Aviv. However, they're also working at full capacity and prices there are expected to return to their pre-pandemic levels soon.

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How the sector bounced back?

The reasons for this miraculous recovery are as follows: First, despite the supposedly large surplus in office space, it should be kept in mind that most of the planned offices have not yet been built. Over the past year, delays occurred in the planning and construction of some compounds, creating new demand.

Second, the hybrid model of working from home part-time continues to operate; however, various firms have realized they must continue holding significant office space

Third, over the year-and-a-half since the pandemic broke out, many hi-tech and technology companies significantly expanded their scope of activity, causing some to expand their office space as well.

Fourth, the bottom line is that life has its own dynamics, and it is always the case that following major crises, recovery is much faster than expected.

However, the issue of surplus planned office space is still relevant. Planning should be cut back where possible, and in-depth planning is needed to convert some office space, particularly in relatively veteran compounds, to housing.

Eyal Bahari is CEO of Zim Bahari Real Estate

This article might include sponsored and commercial content/marketing information. Israel Hayom is not responsible for its nature or its credibility. The publication of such content or information shall not be considered a recommendation and/or an offer by Israel Hayom to purchase and/or use the services or products mentioned in this article.

The post Office space market back on track appeared first on www.israelhayom.com.