Since 2015, Israel has been facing what local authorities are calling a tourism boom. The number of foreign visitors jumped from approximately 2.5 million in 2015 to 3.6 million in 2017. In many in-demand areas, the price of hotel accommodations has gone up as a direct result of the increased demand and the relative shortage of new hotel stock.
To put this into perspective, in 2008, when the number of foreign visitors totaled 2 million, the overall hotel room count in Israel was 49,000. Today, with the visitor number jumping more than 1.6 million (an 80-percent increase), the room count stands at 55,000 (a 12-percent increase).
Focus on Tel Aviv
A recently published global Mastercard study put Tel Aviv among the 10 top European cities whose tourism rate rose most substantially in 2017, coming in at seventh place on the list. The study found that 1.7 million tourists stayed in Tel Aviv last year. This represents an increase of 21 percent over 2016.
The average tourist stay in Tel Aviv last year was 7.9 nights and the average spend per day was US$142. With such a limited stock of hotel accommodations, where are the tourists staying? The answer is Airbnb.
Airbnb offers 8,000 units in Tel Aviv—the same number as the listed hotel accommodations in the metropolitan Tel Aviv area.
That’s almost half of the total Israel inventory of Airbnb, which totaled 16,196 apartments in the country in 2017. The price of an average Airbnb stay in 2017 was US$160 per night, compared to around US$150 to US$180 at a 3-star hotel (regular season), which helps explain why roughly 50 percent of the tourist overnights in Tel Aviv are through Airbnb.
That is no reason to feel sorry for Tel Aviv’s hoteliers. In 2017, the annual average occupancy in the city’s hotels was 74 percent, and in 2018 occupancy is expected to reach 78 to 79 percent.
One can only venture an educated guess that without the alternative accommodations market, occupancy in Tel Aviv hotels would be 90 percent or more and the average room rate would be flying through the roof.
There is no question that Tel Aviv needs an additional 5,000 or more new hotel rooms within the next five years.
Hoteliers understand that Airbnb is here to stay, but at the same time, they ask that some regulatory requirements govern the practice, similar to what has been implemented in other European and U.S. cities, including Barcelona, Spain; Amsterdam; London; Paris; New York; and San Francisco.
The key reasons for the shortage of new hotel stock in Tel Aviv are:
- The high price of land in the city;
- Alternative uses for land, such as offices;
- Lack of appetite from financial institutions to grant funding for new hotel projects;
- The growing shortage of land in Tel Aviv’s main demand areas; and
- High levels of regulation, red tape and bureaucracy involved in the hotel-development process.
Conversions Take Hold
For the past decade, most if not all of Tel Aviv’s new hotel stock has come from conversion of existing buildings such as offices, police stations, post offices, newspaper printshops and more.
- The Setai in the Jaffa area of Tel Aviv, which was a police station dating to the Turkish Ottomans
- The former Clal Insurance house was converted into the NYX Hotel Tel Aviv
- The Amidar office building was renovated into Dan Hotels’ Link & Hub hotel
- The Jaffa, a Luxury Collection Hotel is an old monastery that was converted into a luxury hotel and residences
- The former Jerusalem hotel in Jaffa has been transformed into the Drisco hotel after a painstaking restoration process
Some new hotels were built as part of a mixed-use development office and hotel. One example is the Rothschild 22 hotel operated by Fattal Hotels.
The main reason hotel companies prefer conversions over green-field development is simply because developing a new site in Tel Aviv could take seven to 10 years from the go-ahead, whereas conversions take much less depending on the complexity of the project. If it’s a conversion of an old, historically significant landmark building that needs to be under preservation regulations, this will add to the time of the project.
Additional projects in the planning stage include the Nobu Hotel Tel Aviv, which is a conversion of an old office block into a luxury boutique hotel.
There’s a common denominator among most of the projects. The really old “historical” buildings end up as luxury hotels and the “newer” buildings (40 to 100 years old) end up as design-led, lifestyle limited-service hotels.
Upcoming Office Conversions
One example that illustrates the conversion of offices to hotels and residences is the Gibor Office House—or, in Hebrew, Beit Gibor—just north of the InterContinental David Tel Aviv and the Dan Panorama Tel Aviv Hotel. This office block was completed in 1978 as part of a larger development project consisting of six large office buildings.
The plan for the Gibor building is for it to be converted into luxury residences and a 200-key hotel. The original building will get an additional eight more stories, bringing the height of the building to 25 stories. Internationally known architect Daniel Libeskind is in charge of the project.
According to appraisers who are knowledgeable about the prices offices and residences command in that part of Tel Aviv, the price of one square meter of office space is about US$3,300 and the price of luxury residences per square meter (sea-facing) is about US$17,000-$20,000, depending on the location, the services provided to the owners and the level of luxury of the interior and exterior design finishes.
Residences with more of a back view are estimated at US$12,000 per square meter. Clearly, converting offices to luxury condominiums along the Tel Aviv coastline brings a huge upside for developers.
A similar plan recently was submitted for the Israeli Manufacturers House, also known as the Industry House, which is located in the same building complex just behind the Gibor House. The Israeli Manufacturers Association owns 60 percent of the building, and the remaining 40 percent of the offices are owned by private owners.
At this stage, it is unclear if the owners will convert the existing building or demolish it altogether and rebuild it.
Concerning both projects, one thing is clear: these conversions won’t become 3- or 4-star hotels. The cost of land in this location and the upside on luxury residences will make it an easy choice for deluxe 5-star projects.
The shortage of reasonably priced hotel accommodations—and available land— has become a source of concern for the Israeli Ministry of Tourism and for the Tel Aviv municipality leaders. As a result, the Israeli government has approved grants for developers converting offices to hotels in Tel Aviv amounting to 10 percent of their investment.
The ceiling for grants to developers in Tel Aviv is estimated to be around NIS 25 million. There is no restriction on the number of rooms in a hotel with a ceiling grant of NIS 250,000 per room.
The building should be no less than 2,000 square meters and up to 20,000 square meters and the category should not go above “C,” which is the equivalent of a 3-star superior hotel by international standards.
According to the Ministry of Tourism and Tel-Aviv leaders, there is no restriction on where in Tel Aviv the conversions can take place.
The possible drawbacks to the conversion plan are:
- The alternatives that the owners of these office buddings have in terms of rent.
- The fact that there isn’t a big surplus of offices in Tel Aviv; the technology sector is still growing and many international companies are looking for offices in Tel Aviv.
- The local office market is far less sensitive to changing geopolitical situations.
- Banks and financial institutions feel safer dealing with offices rather than with hotels.
- The office buildings that would be submitted to the plan won’t be in high-demand areas and might be far from the main tourist attractions.
Where The Industry is Headed
The good news is that Tel Aviv is more than halfway to where it needs to be in terms of hotel industry growth.
Developers and landlords are growing an appetite for hotels in their real-estate portfolios. The highly successful Fattal Hotels initial public offering at the Tel Aviv Stock Exchange at the beginning of 2018 has shown owners and potential investors alike that they can make good money by having hotels in their portfolios. More and more insurance companies and pension funds are investing in single-asset hotels, portfolio deals and hotel chains.
In addition, the Ministry of Tourism is attempting to work with the Finance Ministry to provide a safety net for investors in hotel projects. This safety net will be put in place during long periods of hostilities, such as acts of war or prolonged intifada by the Palestinians.
This dialogue hasn’t yet materialized, but the heads of the Finance Ministry understand the significance and importance of such a safety net in order to draw new investments in the hotel sector.
With a clear vision, plenty of patience, and—just as important—ease of funding, converting offices to hotels can become a financially viable alternative for owners and real estate developers.
Joseph Fischer will be moderating the “Travel Panel: Meeting the Needs of Growing Inbound Tourism” at the upcoming Israel Hotel Investment Summit being held in Tel Aviv from Nov. 19-20. Visit www.israelhotelinvest.com.