On July 12, 2020, the Gazit-Globe Real Estate Institute at Reichman University held the second session of its Zoom series on income-producing real estate. Participating in the session, which dealt with office real estate market during and after COVID-19, were Nathan Hetz, founder and CEO of Alony-Hetz Properties and Investments, and Keren Marciano, economic editor of Channel 12 News, who moderated the session.
Prof. Amnon Lehavi, dean of the Harry Radzyner Law School and academic director of the Gazit-Globe Real Estate Institute at Reichman University, greeted the participants at the beginning of the meeting and said, “There is a close connection between the first session of our series, which featured Chaim Katzman, and this second meeting with Nathan Hetz, partly because we are witnessing a significant process that began even before the outbreak of the coronavirus, one which is currently intensifying and will likely continue even after the virus, of the conversion of land within existing projects for other uses at a relatively high speed.” Lehavi noted that as part of this process, the question that is being asked around the world is whether the future of some of the surplus commercial space lies in its conversion to residential projects, or a combination of uses that includes residential alongside commercial and office real estate. According to Lehavi, “In Israel, too, we at the institute are seeing the beginning of this thinking, and the offices are on both sides of the issue. On the one hand, they are thinking about stores that are vacant and which perhaps can be converted into small offices or acoustic boxes near places of residence, and on the other hand, they are thinking about converting office spaces into residential housing, sometimes in the same building. And all this is before we talk about what will happen to the use of hotel land in the future.” In this context, Lehavi noted that: "Laws and regulations, including the Planning and Building Law, will also need to change, so that we can adapt ourselves to the rapid changes in the demand and supply of various uses of real estate.”
During the session, Keren Marciano, the economic editor of Channel 12 News, held a conversation with Nathan Hetz, founder and CEO of Alony-Hetz Properties and Investments. Marciano began by presenting the activities of the Alony-Hetz Group, a holding company that specializes in income-producing real estate and green energy, and operates in five main markets: Israel, the United States (Washington and Boston), the United Kingdom and Switzerland.
Nathan Hetz, founder and CEO of Alony-Hetz Properties and Investments, commented on the group's activities in the various markets in the area of office real estate throughout the COVID-19 era, saying that, “As of now, nothing has happened in terms of rentals. The office sector operates in the medium- and long-term, so tenants are continuing to pay rent both in Israel and in the US, Switzerland and London – although many tenants are not coming into the office due to the various restrictions imposed by regulators in the different countries, and the actual presence in the office is 20% to 50%. But even when the tenants are not in the offices, contractually they continue to pay the rent.”
Regarding the signing of new contracts and the extension of existing contracts in Israel, Hetz said: “Activity over the last six months has continued at rents quite similar to those we saw on the eve of COVID.” In this context, he emphasized that a large portion of the group’s tenants are large high-tech and finance companies, for whom the cost of rent constitutes a relatively small component of the company’s total expenses. Hetz went on to say: “The coronavirus is leading to an economic recession, and businesses may cut back and become more efficient, so over time they may require smaller spaces and as a result prices may fall, but for now the changes have not been dramatic.”
In answer to Marciano's question about whether there has been a difference between the company's activities in Israel and elsewhere in the world during the COVID-19 era, Hetz noted that the trends have been very similar. In Israel, people returned to the office somewhat earlier than in other places around the world, but rents were collected on time and without issue in the United States, England and Switzerland. However, he noted that unlike in Israel, in the United States contractual obligations are ingrained in the culture, and businesses have been provided with significant and rapid financial assistance.
Hetz later responded to the question of whether, in his opinion, the work from home model would endure even after the crisis by saying, "There is no doubt that we are in a time when the future is unclear, and we are still in the midst of a health catastrophe. The pandemic will end after a vaccine is found in a process that I estimate will last one to two years. Some may decide to adopt the work from home model, but I think that people are social animals, and at the end of this health crisis, people will not want to work from home.” He also said that he believes that when people work together, mutual productivity is greater. Hetz noted that: “The health crisis has also become an economic crisis, a recession. Quite a few companies will not survive, quite a few companies will make cutbacks, there will be bankruptcies, and as a result it is possible that for a year or two the office sector will see a drop in prices to some degree and there will be spaces that will be vacated. But with the end of the recession, growth will return and the offices will be full again.”
When asked by Marciano how the crisis will affect the value of properties, Hetz replied: “The assessment is that it does not increase the value of properties, that much is clear. The question is whether prices are falling. There are two trends: On the one hand, there is a fear of tenants’ declining revenues and lower occupancy rates, and on the other hand, the long-term cost of money both in Israel and around the world has fallen sharply. At present, there are no transactions in the market in which prices are falling.”
Hetz went on to comment on the impact of the coronavirus on shared workspaces, saying that in the office space that the group rents to WeWork in Israel, Washington and Boston, the rent is being paid as usual and demand is not currently down. He estimates that during this period tenants will actually even have a preference to rent for short periods of time. Regarding the accelerated construction in the office sector that has taken place in recent years and the possibility of oversupply in the wake of the COVID crisis, Hetz said: “There could very well be an oversupply. Obviously, developers may think twice about starting to build now, and banks may have tighter underwriting standards. The Alony-Hetz Group currently has three projects in the pipeline in Israel that are in their early stages, and we will examine the pace of their progress. In the period since the outbreak of the virus, we submitted a tender for a project at the entrance to the city of Jerusalem, and we won a tender for the construction of a building of nearly 100,000 meters of office space (with the ellied Group) and we are continuing to work as usual, with the building set to be completed in about seven years. In approximately six months’ time we will finish the construction of a new building in the industrial area of Holon. There is no doubt that it will take us more time to rent it out and we will have to be more flexible on price, but the price is half of what it is in Tel Aviv, and we may see companies moving from Tel Aviv to Holon in order to save money.” In his opinion, the large income-producing real estate companies that have a very long-term view and a lot of capital will continue with their plans, for the most part, though perhaps at a lower rate.
Hetz discussed the decline in the shares of income-producing real estate companies in Israel and those of REITs in the US office real estate sector, saying: “There is no doubt that the capital markets are responding very quickly. History shows that markets usually know what to expect from the future, but many times it's an overshoot. There was a big overshoot that repaired itself partially – where is it going? I assume that in the end the truth will be somewhere in the middle. Property prices have gone down a bit, stock prices will go up a bit, and they will balance each other out in the long run.” Hetz added that: “Since the cost of money is very low, the big money managers in the capital market must invest in avenues that will yield a return, like real estate, where even if the yield falls slightly it will still yield a nice return. So this is why the whole world is in recession and the capital markets in the US are at an all time high. There is an unbelievable dissonance. It is true that in real estate there was a decline and it partially repaired itself. What will happen next? We’ll have to wait and see.”
Finally, Hetz referred to the economic situation saying, “I think that economically, the worst is still yet to come,” but in his estimation, after a vaccine is found there will be significant growth that will put the economies back on a positive trajectory.
To watch the recorded session on the Gazit-Globe Real Estate Institute’s Facebook page, click here >>