Daniel sent us this one — he's looking at the luxury high-rise boom in Jerusalem and asking us to get inside the head of a developer. You've got a stock of property sitting there. You can rent it out long-term, throw it on Airbnb, sell it outright, or lease it to corporate tenants. Each path has its own math, its own risk profile, its own headaches. The question is, what market conditions push a developer toward one choice over another?
This is exactly the kind of decision tree I love. Because it looks like four simple options, but once you layer in Israeli property tax law, currency risk, occupancy rates, and the fact that Jerusalem is not Tel Aviv — it gets intricate fast.
Jerusalem is never Tel Aviv. That's practically the city motto.
It matters here. A developer sitting on twenty luxury units in Rehavia or near the Old City is playing a completely different game than someone with the same number of units on the Tel Aviv beachfront. The buyer pool is different, the rental demand is different, the regulatory environment is different.
Walk me through the sell option first. That seems like the obvious one — you build luxury apartments, you sell them. What's the case for that right now?
The case for selling is straightforward. You get your capital back immediately, or at least much faster than any other option. You pay off construction loans, you book your profit, you move on to the next project. In a healthy market, selling is the highest present-value option because you're getting decades of future cash flows discounted into a single lump sum today.
The case against?
The case against is that the market isn't healthy — not for this segment. You've got a shekel that's been strengthening against the dollar for several years now. For a foreign buyer thinking in dollars or euros, a Jerusalem luxury apartment got somewhere between fifteen and twenty-five percent more expensive just from currency movement alone, before you even factor in price appreciation.
The international buyer pool shrinks.
And international buyers were the whole thesis for a lot of these towers. French Jews, American Jews, British Jews buying a pied-a-terre in Jerusalem — that's been the demand story for luxury development here for decades. When the shekel strengthens, that buyer effectively sees a price hike they didn't agree to. Some of them walk away. Some of them delay. Some of them buy in Florida instead.
The developers are surprised by this?
That's what's been reported — developers expressing surprise at slow international uptake. Which, honestly, I find a little hard to believe. Currency risk isn't exactly an exotic concept. But I think what they're really surprised by is the duration of the shekel's strength. They probably modeled a temporary bump and got a structural shift.
There's also the question of who's buying locally. Jerusalem's median household income is not funding a four-million-shekel apartment.
The local buyer pool for genuine luxury units is tiny. Jerusalem has a lot of wealth, but it's concentrated in specific communities, and many of those families already own. So if international demand is soft and local demand is thin, your unsold inventory just sits there. And sitting inventory is a developer's nightmare because you're still paying maintenance, still paying property tax, still paying interest on construction loans.
Which pushes you toward the rental option.
And this is where it gets interesting from a policy perspective. If developers who planned to sell luxury units instead convert them to long-term rentals, that actually adds supply to a rental market that desperately needs it.
If they're luxury units renting at luxury prices, does that help the housing crisis?
It helps indirectly. Even luxury rentals absorb demand from high-income renters who would otherwise be competing for slightly less expensive units, which then frees up those units for middle-income renters, and so on down the chain. It's not a perfect mechanism — filtering takes time — but adding supply at any price point tends to reduce pressure across the board.
The trickle-down theory of apartments.
Housing economics, not Reaganomics. The evidence on filtering is actually reasonably solid. When you don't build luxury units, wealthy renters don't disappear — they just outbid poorer renters for existing stock.
What's the math on renting versus selling from the developer's perspective?
The key variable is cap rate — the net operating income divided by the property value. In Jerusalem, cap rates for residential rental have historically been quite low, maybe two to four percent. That's terrible compared to what a developer could earn by selling and redeploying capital into a new project.
Two to four percent sounds like a savings account, not a real estate investment.
That's why developers don't typically build with the intention of renting in Jerusalem. They rent because they can't sell, or because they're betting on future appreciation. The rental income just covers costs and debt service while they wait for the market to improve.
It's a holding pattern.
For many of them, yes. But a holding pattern is expensive. You need a property management company, you need to handle tenant turnover, you need to deal with maintenance requests at two in the morning. Most developers aren't set up for that operationally. They're builders and sellers, not landlords.
Which brings us to option three — short-term rentals.
Now this is where the decision tree gets really interesting, because short-term rental economics in Jerusalem are unusual.
Jerusalem has extremely lumpy tourism demand. You get massive spikes around the High Holidays, Passover, Sukkot, and then very quiet periods in between. A unit that can command four hundred dollars a night during Sukkot might sit empty for three weeks in February.
Annualized, it might not beat a long-term lease.
It might not. But it depends heavily on location and management quality. A well-run Airbnb in a prime location — think within walking distance of the Western Wall or the Machane Yehuda market — can still generate significantly more annual revenue than a long-term rental, even with the seasonality. The question is whether the premium compensates for the operational complexity.
The regulatory risk.
That's the big one. Jerusalem has been tightening short-term rental regulations. There are registration requirements, there are limits on the number of days you can rent, there's talk of additional taxes. And the city has a strong political constituency that hates short-term rentals because they're seen as removing housing stock from the long-term market and turning residential buildings into de facto hotels.
Which, to be fair, they do.
They absolutely do. A building where half the units are Airbnbs is not a residential community anymore. It's a hotel with a homeowners' association. The neighbors hate it, the city hates it, and the regulatory trend is against it. So a developer looking at Airbnb has to price in the probability that the rules get stricter.
The fourth option — corporate leasing.
This is the sleeper option that doesn't get enough attention. Long-term corporate leases — think tech companies, diplomatic missions, international NGOs — they'll lease entire apartments or even entire floors for their staff on multi-year contracts. The rent is usually below market rate for individual units, but you're getting occupancy guarantees, professional tenants who won't trash the place, and zero turnover costs for two or three years at a stretch.
What kind of corporate presence are we talking about in Jerusalem?
It's not Tel Aviv — you don't have Google and Microsoft leasing entire towers. But Jerusalem has a growing tech scene, especially in biotech and AI, anchored around the Hebrew University and Hadassah. You've got Mobileye's headquarters, you've got Intel's Jerusalem campus, you've got a cluster of startups in the city center. Plus there's the diplomatic corps — every consulate, every embassy, every UN agency needs housing for staff.
The diplomatic tenant is basically the gold standard, isn't it?
Diplomatic tenants are incredible. They pay on time because their government's credit rating is on the line. They don't complain about minor issues because they don't want to create diplomatic incidents over a leaky faucet. They tend to stay for multi-year postings. The downside is they're hard to land as clients — you need connections, you need to understand their procurement processes, you need the right kind of inventory.
If I'm a developer with fifty luxury units sitting empty, and the international sales market is frozen, what am I actually doing?
You're probably doing a mix. You're renting some units long-term to stop the bleeding on carrying costs. You're testing a few units on Airbnb to see if the premium justifies the hassle. You're quietly approaching consulates and tech companies about corporate leases. And you're keeping a handful of units staged and ready for sale in case a buyer shows up.
The portfolio approach.
Which sounds sophisticated, but it's really just a developer who can't sell trying to look like they have a strategy. The truth is, most of these developers built for sale. Everything else is plan B.
Let's talk about the tax dimension, because I know Israeli property tax law has some quirks that shape this decision.
It shapes it enormously. The big one is capital gains versus rental income. If you sell a property in Israel, you're generally subject to capital gains tax — but there are exemptions. If you're an individual selling a residential property, the exemption rules are relatively generous. If you're a developer selling inventory, it's treated as business income, not capital gains, and the tax rate is higher.
The tax code is actually pushing developers toward selling?
No, it's more complicated than that. If you're a developer and selling is treated as ordinary business income, you might face a marginal tax rate that's quite high — corporate tax is twenty-three percent, and then there's dividend tax on top if you want to take money out of the company. Meanwhile, rental income for residential properties has historically benefited from a very favorable tax regime in Israel.
The exemption for residential rental income.
Up to a certain threshold, residential rental income in Israel is exempt from tax entirely. The threshold has moved around over the years, but the basic policy has been consistent — the government wants to encourage landlords to rent out residential units, so they make it tax-advantaged.
The tax code is actually pulling in both directions.
It's pulling toward renting, at least for the individual investor. For the developer who built to sell, the tax treatment of rental income is less relevant because their corporate structure is set up for sales. But if they convert unsold inventory into a rental portfolio, they might restructure or spin off a holding company to capture those tax advantages.
Then there's property tax — arnona.
Arnona is a whole separate nightmare. In Jerusalem, arnona on a residential unit is paid by the occupant — either the owner if they live there, or the tenant if it's rented. But on an empty unit, the owner pays. And the rates are not trivial. A luxury apartment in Jerusalem might carry an annual arnona bill of ten thousand shekels or more. Multiply that by fifty empty units, and you're burning half a million shekels a year just on property tax for apartments nobody's living in.
Empty units are a slow bleed.
A fast bleed, really. Between arnona, maintenance, security, and debt service on construction loans, an empty luxury unit in Jerusalem is probably costing the developer three to five thousand shekels a month. That adds up fast when you're sitting on dozens of units.
Which creates a pretty powerful incentive to get someone — anyone — into those units, even at below-market rent.
And that's where you see developers making decisions that look irrational from the outside but make perfect sense once you factor in the carrying costs. Renting a four-million-shekel apartment for six thousand shekels a month is a terrible cap rate — it's less than two percent — but it beats losing five thousand shekels a month on an empty unit.
Occupancy becomes the overriding priority once the sales market freezes.
And that's actually the hopeful part of the story from a housing crisis perspective. When developers can't sell, they rent. When they rent, supply increases. When supply increases, rents stabilize or even decline. The market mechanism does work — it just works through a path that nobody planned for.
The invisible hand, wearing a disappointed developer's expression.
That's the image. Picture a developer who spent three years and two hundred million shekels building what was supposed to be the most desirable address in Jerusalem, and now he's on the phone with a property management company trying to figure out how to screen tenants.
Let's dig into the currency question more, because I think it's the underappreciated variable here.
It's everything. The shekel has been one of the strongest currencies in the world over the past decade. There are structural reasons for that — Israel's tech sector generates enormous foreign currency inflows, the central bank has built up massive reserves, the current account has been in surplus for years. For a foreign buyer, a Jerusalem apartment priced in shekels has just gotten more and more expensive over time.
Developers price in shekels.
Construction costs are in shekels. Labor is in shekels. Land was purchased in shekels. They can't suddenly switch to dollar pricing just because international buyers prefer it — or rather, they can, but then they're taking the currency risk onto their own balance sheet.
Which some of them have done.
Some have, and it's burned them. If you signed a purchase agreement with a foreign buyer two years ago at a dollar price, and the shekel has appreciated fifteen percent since then, you just took a fifteen percent haircut on that sale. That's brutal.
What's the developer who wants to rent actually hoping for?
They're hoping for one of two things. Either the shekel weakens, which would revive international sales demand, or local rental demand proves strong enough to support decent occupancy at decent rates. The nightmare scenario is a strong shekel plus weak local rental demand — that's when you're really stuck.
Which scenario are we in?
It depends on the segment. At the very high end — we're talking penthouses, units above ten million shekels — the local rental market basically doesn't exist. Nobody in Jerusalem is paying thirty thousand shekels a month in rent. Those units need foreign buyers or they sit empty. At the more moderate luxury tier — say three to five million shekels — the rental market can absorb some of that inventory, but only at rents that represent a lousy return for the developer.
Let's talk about the Airbnb economics specifically. You mentioned the seasonality. Paint me a picture of the numbers.
Let's take a well-located three-bedroom apartment in central Jerusalem. As a long-term rental, it might command seven or eight thousand shekels a month — call it ninety thousand shekels a year. As an Airbnb, it might do four hundred shekels a night on average, but you're only getting maybe two hundred occupied nights per year once you account for the seasonal troughs.
That's eighty thousand shekels.
Gross revenue is actually lower than the long-term rental. But the Airbnb path gives the developer flexibility — the unit can still be shown to potential buyers, it can be pulled off the short-term market at any time, and the developer isn't locked into a multi-year lease with a tenant who has protected status under Israeli law.
The tenant protection issue is huge.
It's massive. Israeli law is very tenant-friendly. Once you have a tenant in place, evicting them is difficult and slow. If a buyer suddenly appears and wants vacant possession, you can't just give the tenant thirty days' notice. You might need to negotiate a buyout, or wait for the lease to expire, or go through a legal process that takes months.
Airbnb is partly a flexibility play, not just a revenue play.
It's the option value of keeping the unit available for sale. And that option value might be worth accepting lower annual revenue than a long-term lease would generate.
Which brings us back to the corporate lease. That seems like it splits the difference — you get a multi-year commitment, but the tenant is a professional entity that's less likely to invoke tenant protections.
You get predictable cash flows, which matters enormously if you're trying to refinance construction loans. A bank looks much more favorably on a building with a three-year corporate lease in place than on a building full of Airbnbs with wildly variable monthly revenue.
The corporate lease is the bank's favorite option.
The bank's favorite, and increasingly the developer's favorite once they accept that selling isn't happening soon. The challenge is that the corporate leasing market in Jerusalem is not deep. There are only so many consulates, only so many tech companies with relocation needs. If every developer in the city suddenly pivots to corporate leasing, the demand just isn't there to absorb the supply.
Which means some developers are going to be stuck with worse options.
That's the competitive dynamic nobody's talking about. All these developers built for the same buyer pool — wealthy foreign Jews buying luxury apartments in Jerusalem. When that buyer pool shrinks, they all pivot to the same alternatives simultaneously. The rental market gets flooded, which pushes down rents. The Airbnb market gets crowded, which pushes down nightly rates and occupancy. The corporate leasing market gets saturated.
A tragedy of the commons, but the commons is the luxury housing market.
The developers are the ones getting tragified. Which, I have to say, is not the usual direction of sympathy in these stories.
No, but it's useful to understand their incentives if you want to predict what happens next. Because they're not going to just sit there and lose money forever.
They'll eventually cut prices on sales, or accept lower rents, or convert units to other uses, or — in the worst case — default on their loans and hand the keys to the bank. And banks do not want to be landlords.
What does the bank-as-landlord scenario look like?
Banks are not set up to manage residential property. They'll sell the distressed assets at a discount to whoever will take them, which could be an opportunity for a different kind of investor — someone who actually wants to be a long-term landlord and can make the numbers work at a lower cost basis.
The developers who bought land at peak prices and built at peak construction costs are in the worst position.
If you're a developer whose all-in cost per unit is, say, two and a half million shekels, and the market is telling you that unit is worth two million as a rental property, you're underwater. You can't sell because nobody will pay your cost basis. You can't rent profitably because the cap rate doesn't cover your financing costs. You're in what they call a negative carry situation — every month you hold the property, you lose money.
How many developers are in that situation right now?
It's hard to know exactly, but the anecdotal reporting suggests it's not a small number. The combination of high land costs, high construction costs, a strong shekel, and soft international demand is a perfect storm for the luxury segment.
Let's zoom out for a second. The prompt asked about the decision tree from the developer's perspective, and I think we've mapped it. But there's a normative question lurking here — should we want developers to succeed in renting out luxury units, or should we want them to fail so the assets get repriced at levels that allow for more affordable housing?
That's the tension. If developers succeed in renting luxury units at high rents, they validate the luxury development model and encourage more of it, which doesn't directly address the affordable housing shortage. If they fail, assets get repriced, but there's a lot of pain in the meantime — construction jobs lost, bank balance sheets damaged, unfinished projects blighting the landscape.
There's a third path, which is that they succeed at renting, but at rents that are lower than they planned, and the market gradually adjusts expectations about what luxury development in Jerusalem can actually yield.
That's the soft landing scenario. And it's probably the most likely one. Developers don't all go bankrupt — they just make less money than they projected. Future projects get scaled back or redesigned for more realistic price points. The luxury tower boom cools off, and developers start building for the market that actually exists rather than the market they wished existed.
The market that actually exists in Jerusalem is a lot of young families, a lot of students, a lot of lower-income households, and a small wealthy segment. The luxury tower boom was betting on a wealthy segment that was supposed to be much larger than it turned out to be.
That bet was not crazy at the time it was made. Jerusalem has been growing, the tech sector has been creating wealth, and the city has a unique emotional pull for diaspora Jews that developers thought would translate into sustained demand. It just didn't translate at the price points they built for.
The emotional pull is real, but it doesn't make someone pay double what they'd pay in Tel Aviv for a comparable unit.
That's the thing — Jerusalem commands a premium for some buyers, but it's not an unlimited premium. At some point, even the most committed Zionist looks at the numbers and says, I love Jerusalem, but I'm not paying four million shekels for a three-bedroom apartment when I can get the same thing in Tel Aviv for two and a half.
Or in Florida for a million dollars.
The competition for the Jewish luxury buyer is global. Jerusalem is competing with Miami, with New York, with London, with Paris. When the shekel strengthens, Jerusalem loses that competition. When it weakens, Jerusalem wins.
The developer's decision tree, in the end, is at the mercy of the currency markets.
More than anything else. A ten percent move in the shekel-dollar exchange rate probably matters more for the viability of Jerusalem luxury development than any zoning change, any tax incentive, any marketing campaign.
Which is a sobering thought for anyone trying to plan a multi-year development project.
It's almost impossible to hedge effectively over a three-to-five-year development timeline. Currency forwards and options exist, but they're expensive, and the market for long-dated shekel hedges is not particularly deep. Most developers just take the risk and hope it works out.
When it doesn't, we get empty luxury towers and developers scrambling into the rental market.
Which, circling back to the original question, is exactly what we're seeing. The decision tree in practice: can't sell because of currency and weak international demand, so they try Airbnb for flexibility, find it's operationally complex and politically fraught, then pivot to long-term rentals as the least-bad option, with some corporate leasing on the side for the lucky few who can land those deals.
The hopeful part, as you said, is that this adds rental supply to a market that desperately needs it.
The mechanism is messy, the developers are unhappy about it, and it's not solving the affordable housing crisis directly. But it's better than empty units. Empty luxury towers are the worst outcome for everyone — they don't house anyone, they don't generate rental income, they don't pay property taxes that fund city services, they just sit there as monuments to bad forecasting.
The ghost towers we've talked about before.
And the shift to rental, even at luxury price points, means those towers stop being ghosts. They become actual homes for actual people, even if those people are wealthier than the average Jerusalem resident.
There's one more angle I want to explore — the construction quality question. A lot of these luxury towers were built to a spec that assumes owner-occupancy. How does that affect the rental conversion?
Owner-occupiers expect certain finishes — marble countertops, high-end appliances, fancy bathroom fixtures. Renters, even luxury renters, are harder on units. A developer who converts to rental is going to see higher maintenance costs and faster depreciation of those expensive finishes than they would if the units were owner-occupied.
The unit that was designed to be sold is actually more expensive to rent out than a unit designed for rental from the start.
Purpose-built rental buildings use more durable materials, simpler finishes, standardized fixtures that are cheap to replace. A luxury condo conversion is the opposite — everything is custom, everything is expensive to repair, and the developer is constantly getting calls about the imported Italian faucet that stopped working.
The imported Italian faucet of regret.
That's the title of the developer's memoir.
If you're advising a developer who's about to break ground on a new project in Jerusalem today, what do you tell them?
I tell them to design for rental from day one. Build simpler, build more durable, optimize for operational efficiency rather than sales brochure glamour. And I tell them to be realistic about who their tenant is going to be. In Jerusalem, the rental market is dominated by students, young couples, and families — not by the international elite. Build for that market.
Which is a very different project than what's been going up.
Lower margins, lower risk, steadier returns. It's not as exciting as the luxury tower play, but it's a real business with real demand behind it.
It actually addresses the housing crisis.
A thousand units of purpose-built rental housing for middle-income Jerusalemites would do more for this city than ten luxury towers full of empty penthouses.
Alright, let's bring this home. If I'm a developer sitting on unsold luxury inventory in Jerusalem right now, my decision tree looks like this. Option one, sell — blocked by currency and weak demand. Option two, Airbnb — possible but operationally complex, politically risky, and the seasonality math is worse than it looks. Option three, corporate lease — great if you can get it, but the market is shallow. Option four, long-term rental — the least-bad option, tax-advantaged, stops the bleeding on carrying costs, but caps your return at a pretty unexciting level.
The wildcard is always the shekel. If it weakens, the whole calculus shifts back toward selling. If it stays strong or strengthens further, the pivot to rental becomes permanent for a lot of these projects.
Which means the Jerusalem housing market's fate is being decided, in no small part, by monetary policy and tech export revenues.
Welcome to the modern economy. Your apartment's rent is set by the same forces that determine the price of Wix and Mobileye stock.
That's a sentence that would have made no sense thirty years ago.
Now it's just how things work.
I think we've done justice to the decision tree. Anything we missed?
I think we covered the four options, the tax dimension, the currency risk, the operational challenges of each path, and the broader market dynamics. The one thing I'd add is that this is an evolving story — the developers' decisions today are going to shape the Jerusalem housing market for the next decade. If the rental pivot sticks, we could see a permanent shift in how housing gets built in this city.
From build-to-sell to build-to-rent.
Which would be a structural change, not just a cyclical one. And that would be good news for renters, even if it's bad news for developers' profit margins.
The market, as they say, finds a way.
It just takes its time about it.
Now: Hilbert's daily fun fact.
Hilbert: During the Cold War, the ball used in real tennis — the original indoor racket sport from which lawn tennis descended — was traditionally made with a core of cork and fabric tightly wound with wool, but the version played at the court in Niamey, Niger, uniquely incorporated a binding agent derived from locally harvested gum arabic, giving the ball a slightly denser bounce and a faintly sweet smell when struck.
...right.
I have so many follow-up questions, and I'm going to suppress all of them.
The thing I keep coming back to with this whole developer decision tree is how much of it comes down to factors outside anyone's control. You can be the smartest developer in Jerusalem, you can pick the best location, you can build the most beautiful building — and then a central bank decision in Washington or a tech IPO in Tel Aviv moves the shekel five percent, and your entire business case evaporates.
That's the part of real estate development that doesn't make it into the glossy brochures.
It never does. The brochure shows the infinity pool and the Italian kitchen. It doesn't show the currency forward curve and the cap rate sensitivity analysis.
Which, to be fair, would be a much less compelling brochure.
I would read that brochure.
I know you would. That's why you're you.
This has been My Weird Prompts. Thanks to our producer, Hilbert Flumingtop, for keeping this show running. If you enjoyed this episode, leave us a review wherever you get your podcasts — it genuinely helps other people find the show.
I'm Corn.
I'm Herman Poppleberry. We'll catch you next time.
