The Great Office Bifurcation

Why headlines about Israel’s empty towers tell only half the story, and where the smart money is quietly migrating.

The Myth of the Empty Office

A casual glance at Israel’s commercial real estate headlines paints a grim picture: soaring vacancy rates in new towers, companies delaying leases, and a market struggling with political uncertainty. Many new properties are indeed finding it difficult to secure tenants, leading to vacancy levels rarely seen in Israel. This narrative, however, misses a seismic shift occurring just beneath the surface. The office isn’t dying; it’s being redefined. We are witnessing a ‘flight to quality’—a fundamental split between undesirable, older buildings and the high-demand, premium assets that are becoming the new standard.

The hybrid work model, accelerated since 2020, is the catalyst. Companies now understand the office is no longer just a place for work, but a hub for collaboration, culture, and attracting top talent. As a result, they are abandoning outdated spaces in favor of modern, amenity-rich buildings in prime locations, even if it means paying a premium. This has created a two-tiered market: while older, B-class buildings face an existential crisis, A-class properties in core business districts are demonstrating surprising resilience and, in some cases, record demand.

Decoding the Numbers: Price vs. Value

In the first quarter of 2025, the Tel Aviv office market showed remarkable strength despite broader market caution. Transactions for office spaces commanded an average price per square meter of around ₪46,200 in the city’s prime areas. This highlights the investor confidence in top-tier assets. At the same time, reports from late 2024 showed new buildings in less central areas struggling, with some projects in Petah Tikva and even parts of Ramat Gan reporting occupancy as low as 40%.

This disparity is the key. An investor focused solely on a low entry price might buy into a B-class building in a secondary location, only to face high vacancy and stagnant rental growth. The savvy buyer, however, understands a crucial concept: Yield vs. Total Return. While gross rental yields across Israel average around 3.38%, this figure is misleading. A-class properties in prime Tel Aviv may offer a lower initial yield of around 4.3%, but they compensate with strong capital appreciation, often exceeding 13% annually. This is what we call Total Return—the combination of rental income and asset value growth. In a bifurcated market, chasing a high initial yield in a low-quality asset is a high-risk strategy.

Where the Smart Money Is Going: Three Districts in Focus

Understanding where to invest requires a granular look at the micro-markets. Not all prime locations are created equal, and each offers a distinct risk-and-reward profile for the discerning buyer.

1. Tel Aviv – The Rothschild Hub & CBD

The undisputed heart of Israeli business, the area around Rothschild Boulevard remains the gold standard. It is dominated by finance, law, and global tech firms who demand prestige and proximity to the city’s pulse. Despite new towers adding to the skyline, vacancy for prime assets remains exceptionally low, reflecting intense buyer competition. The typical buyer here is an institutional investor or a well-established company seeking a flagship headquarters. They are less sensitive to price and more focused on long-term value preservation and brand positioning.

2. Herzliya Pituach – The Tech & Innovation Campus

Long favored by Israel’s high-tech industry, Herzliya Pituach offers modern office parks with a campus-like feel. It attracts both established international tech companies and fast-growing startups. While not as centrally located as Tel Aviv’s CBD, its appeal lies in its concentration of talent and modern infrastructure. The ideal buyer is a growth-stage tech company looking to own its space for stability or a private investor targeting the tech sector’s rental demand. The risk here is higher sensitivity to tech industry cycles, but the rewards include a dynamic tenant base and slightly more accessible entry prices than central Tel Aviv.

3. Ramat Gan – The Diamond Exchange District (Bursa)

A nexus of commerce and transport, the Bursa is in the midst of a massive transformation. While traditionally the center of the world’s diamond trade, it’s rapidly evolving into a major metropolitan business district with new skyscrapers planned to add significant office space. Its key advantage is its unparalleled connectivity, sitting at the junction of major highways and rail lines. The buyer profile is diverse, ranging from small business owners and investors acquiring individual office units to large developers undertaking massive projects. This area represents a calculated bet on future growth, offering higher potential returns but also the risk of temporary oversupply as new towers come online.

Practical Hurdles & Strategic Plays

Buying an office in Israel is not without its challenges. High upfront capital is a given, and financing from banks is typically stricter than for residential properties. Buyers must also factor in ongoing costs like Arnona (municipal tax) and Va’ad Bayit (building management fees), which can be substantial, especially for commercial properties in prime cities like Tel Aviv and Jerusalem. Arnona rates are calculated per square meter and vary significantly based on location and building use, with commercial rates being much higher than residential ones.

The strategic play for today’s buyer is to look beyond the immediate price tag and focus on the asset’s long-term viability. This means prioritizing buildings with LEED certifications, advanced amenities, excellent transport links, and a strong tenant mix. For business owners, purchasing an office locks in future costs and provides stability against rising rents. For investors, it’s a tangible asset that, when chosen correctly, offers both reliable income and a hedge against inflation. While the overall market is facing a recalibration, significant capital remains poised to invest in high-demand locations.

Too Long; Didn’t Read

• The Israeli office market is split; older buildings are struggling while modern, A-class properties in prime locations are in high demand.
• Don’t just chase high yields. Focus on Total Return, which combines rental income with capital appreciation, strongest in premium assets.
• Tel Aviv’s CBD is for prestige and stability, Herzliya Pituach for tech-focused growth, and Ramat Gan’s Bursa for high-potential transformation.
• The “flight to quality” is the defining trend; companies and investors are prioritizing well-located, amenity-rich buildings to attract talent and secure value.
• Be prepared for high entry costs and ongoing expenses like Arnona (municipal tax), which are significantly higher for commercial properties.