Tech and Tourism in Tel Aviv, the World's Most Expensive City

There is something magical about Tel Aviv. This thriving Israeli city is home to about 460,000 residents and hosts around 2 million tourists annually. Tourists come for the beaches, for the delicious Meditteranean cuisine, for the shopping on Dizengoff, for the Olde Jaffa walking tours, and for that authentic Israeli energy. Life is great in Tel Aviv, but you will have to spend some shekels to really live it up. According to the EIC, Tel Aviv is the most expensive city in the world. In this article, we dive into Tel Aviv Open Data to see how tech and tourism impact the cost-of-living in the first Jewish, Hebrew-speaking city, Tel Aviv - Yafo.

Tourism is booming in Tel Aviv

The most visited site in Israel is the Western Wall in Jerusalem. About 5 million people come to see what remains of the retaining wall that King Herod built to support the Second Temple. The site is holy to the Jewish people because it is the closest place to the Temple Mount where they are allowed to pray. The second most visited site in Israel is Masada in the Judean desert. Herod built a palace-fortress in the middle of the desert that he could escape to if he ever had to flee the Romans. Sites like these are historic and rich in tradition with Biblical importance that draws in believers from all over the world. Tel Aviv doesn't have the historic significance of Jerusalem, but it has a certain appeal that sparked a tourism boom in the last 5 years. 

Why are so many hotels popping up in Tel Aviv over the last 5 years (relative to the previous decade)?

I have a few theories. As I mentioned, Tel Aviv doesn't have the history but it does have the future - and the future is tech. Tel Aviv is the silicon valley of the middle east. According to the US-Israel Business Alliance, there are currently 80 Israeli-founded unicorn companies operating in the US. A unicorn is a privately held company valued at $1 Billion dollars or more. These 80 unicorns were born in Israel (practically all of them in Tel Aviv according to finder.startupnationcentral.org), before relocating to the US to scale. 

Tech hubs like San Francisco and Tel Aviv receive billions of dollars in venture capital to fund startups. Most of the capital is invested in labor - developers and project managers that command high salaries. These high income earners are concentrated geographically, and their purchasing power bids up the value of the real estate and attracts a cadre of entrepreneurs, restauranteurs, and local developers. Tel Aviv exports tech and imports capital. My theory is that the technology ecosystem makes Tel Aviv a rich and affluent city, which is attractive to tourists. 

Deregulation and the Open Skies Agreement

Regulation and geopolitics always play a factor in Israel. The Open Skies Agreement was signed between Israel and the EU in 2012 to increase the number of foreign airlines operating in Israel and boost the frequency of flights. Israeli airlines obviously opposed the Open Skies Agreement because it opened the market to competitors. More competition is better for travelers because it generally leads to lower prices and better overall service. However, to make the transition to deregulation easier for Israeli airlines, the Transportation Ministry lifted restrictions over a five-year time horizon, each year allowing slightly more foreign airlines to operate in Israel. By 2017, there were no restrictions on foreign airlines. 

In the chart below, you can see the jump in tourist arrivals and upward trajectory starting in 2017 when air travel in Israel was fully deregulated. The number of hotels popping up in Tel Aviv starting in 2015 is a direct result of the Open Skies reform signed in 2012 with the Europeon Union. 

A Receipt For Expensive Cities

In Tel Aviv, the tech ecosystem and the booming tourist industry are the two main components of the high cost of living. According to Airdna.co, a site that uses Airbnb data to help host price units more efficiently, the average daily rate in Tel Aviv is $198. Hosts can earn four thousand USD a month on just 20 days of occupancy. Given these economics, landlords are often incentivized to offer short-term rentals on Airbnb as opposed to long-term leases to Israelis. While Airbnb creates a ton of value - by giving travelers a unique experience and allowing hosts to tap into the $7 Billion Israeli tourism industry - it does have its drawbacks, at least for locals, Airbnb drives up rents in A1 areas. 

I was blessed to spend time in Tel Aviv for a few weeks. I went during the Israeli winter season and the weather was superb - sunny in the 70s. I hit all of the usual tourist sites including Rothschild Blvd, the Art Museum, and Neve Tzedek, the first Jewish neighborhood outside of the port city, built in 1887. Every morning, as I jogged down the boardwalk of the Mediterranean, only one thought crossed my mind, "this might be the most expensive city in the world, but they sure as hell earned it." Tel Aviv is in right now!