Israel: An Overview
2025 saw the continuation of the Hamas-initiated October 7 war, which reached its crescendo in June with an intense conflict with Iran. The year ended with a cessation of hostilities, the return of all living hostages, and a weary hope for a calmer, more stable future. Despite these challenges, the Israeli economy and the local legal market continued to demonstrate surprising resilience.
Looking ahead, 2026 is expected to have its own challenges, including local parliamentary elections scheduled for October. In the interim, Israel is likely to continue being affected by global trends, including geopolitical shifts and their impact on defence procurement, as well as significant fluctuations in currency exchange rates. In particular, the strengthening of the Israeli shekel against the US dollar in early 2026 is expected to have a substantial impact on the local economy.
Innovation and Technology
In 2025, Israel’s technology sector once again demonstrated resilience amid sustained geopolitical and macroeconomic uncertainty. Elevated regional tensions, particularly with Iran, continued to weigh on investment flows – especially foreign investment – during the first half of the year. However, the local ecosystem showed relative security and predictability, as confidence gradually returned among foreign investors, companies and other players in the local ecosystem in late 2025.
Global investor interest continued to recalibrate with a clear preference for Israeli technology companies demonstrating capital efficiency, disciplined cost structures and defined routes to revenue. Alongside Israel’s established strengths in AI, cybersecurity and fintech, defence and dual-use technologies emerged as a leading focus of both domestic and international capital. This trend was driven by rising demand for solutions in areas such as autonomous systems, counter-drone, cyber defence, secure communications and battlefield software.
Domestically, Israeli technology companies continued to adapt to tighter funding conditions and longer fundraising cycles. Rightsizing and cost-control measures remained common, particularly among mid-to-late-stage companies, while many companies increasingly pursued non-dilutive funding alternatives to avoid “down-round” financing. At the same time, early-stage activity remained robust, with a noticeable increase in defence-tech and homeland-security start-ups. These start-ups leveraged talent and operational experience from Israel’s security forces and ecosystem, even as competition for personnel, reserve duty demands, and procurement timelines posed additional constraints.
The Israel Innovation Authority continued to play a central role in supporting the ecosystem, expanding R&D funding and maintaining targeted support mechanisms for early-stage companies, including investor consortia, fast-track grant programmes, and enhanced support for the importation of enabling technologies.
Overall, while optimism remained measured, Israel’s technology sector retained global prominence, relevance and competitiveness, supported by a deep and unique pool of talent, entrepreneurial capacity and continued commitment to innovation. AI, cybersecurity, and defence technologies remained key growth engines, with defence-tech particularly benefiting from real-world operational needs that enabled rapid development, iteration and validation rarely available in other markets.
Infrastructure: Transportation, Energy and Data Centres
Israel’s infrastructure momentum continued through 2025 and into early 2026. Despite a general reduction in government expenditure following the October 7 war, the majority of major national infrastructure projects – whether related to transportation or energy – continued to progress.
In the transportation sector, the Tel Aviv Metro remained a central national priority throughout 2025. Notably, in November 2025, a pre-qualification invitation was published for the “Infra 1” tunnelling works, inviting leading international contractors to participate in what is expected to be Israel’s largest-ever infrastructure project.
The gas sector also continued to benefit from the significant discoveries of the past decade. In 2025, a major gas supply agreement related to the Levithan reservoir was announced with Egypt, reportedly valued at approximately USD35 billion. In parallel, several global energy giants were awarded exploration licences in Israel, including British Petroleum (BP), Azerbaijan’s SOCAR, Italy’s ENI and South Korea’s Dana Petroleum, reflecting renewed international confidence in Israel’s upstream sector.
The Israeli energy market also experienced an accelerated transition toward a more deregulated and decentralised structure. The implementation of the electricity “market model” reform effectively ended the state-owned Israel Electric Corporation (IEC) monopoly over electricity supply, reshaping the competitive landscape and opening new opportunities for private producers and suppliers.
Finally, late 2025 was marked by a surge in mega deals in the data centre sector, headlined by Nvidia’s USD1.5 billion investment in a massive AI supercomputing hub in Mevo Carmel. Amazon (AWS) also expanded its footprint in Israel significantly, with letters of intent signed to double its local capacity to approximately 40 MW through new hyperscale facilities near Netanya.
Real Estate
The Israeli real estate market in 2025 continued to reflect a mixed and evolving picture across its various segments. In the residential sector, market activity remained cautious. Demand was constrained by continued financing challenges and persistent uncertainty, while residential prices generally showed limited movement. Certain areas experienced price declines, reflected in widespread sales promotions and incentives offered by various developers.
Construction activity showed signs of improvement in parts of the market, with additional construction projects resuming or advancing during the year, However, developers remained sensitive to construction costs, labour availability and sales pace, resulting in a continued focus on risk management and phased project execution.
The commercial real estate sector remained broadly stable, supported by ongoing domestic consumption and continued strength in well-located malls and community commercial centres. At the same time, certain sub-sectors continued to face pressure, particularly offices in specific locations, reflecting evolving workplace patterns and increased tenant caution. By contrast, logistics and essential-needs retail remained comparatively resilient.
Foreign investors showed a measured approach to the Israeli real estate market in 2025. While some investors continued to view Israel as a long-term market, real estate cross-border activity was influenced by geopolitical considerations, currency fluctuations and financing conditions. Where foreign investment occurred, it tended to focus on prime, income-producing assets with strong tenants, as well as selective opportunities in residential development and urban renewal, often through local partnerships. In addition, global developments affecting Jewish communities, due to the situation in Israel and the region, had a significant impact on acquisitions by Jewish investors of Israeli residential real estate.
Outlook for 2026
The Israeli economy appears to be on a positive trajectory. According to the Bank of Israel’s forecast, the economy is expected to grow by 5.2% in 2026, with inflation projected to stabilise at around 1.7%, and the Israeli shekel continuing to strengthen. In parallel, the Bank of Israel’s interest rate policy is expected to remain stable, supporting a gradual reduction in financing costs and encouraging increased investment across the economy. Higher workforce availability and adaptation will remain a key factor, particularly in sectors requiring specialised skills, such as construction, engineering and high-tech. Taken together, these developments support a more favourable environment for business activity and investment, including a gradual reduction in the cost of capital, improved pricing capacity and lower macroeconomic uncertainty. These conditions are likely to translate into increased M&A activity, particularly in transactions supported by clear operational viability and stable financing, rather than those driven primarily by expectations of future growth.
From a regional perspective, the reconstruction of the Gaza Strip may have significant economic implications, including a direct impact on Israel’s construction and infrastructure sectors and a longer-term effect on Israel’s position within the overall economy of the Middle East. In the shorter term, a large-scale reconstruction effort is likely to generate significant demand for raw materials, engineering services, financing and infrastructure, benefiting both Israeli and international players operating in these fields.