Commercial property values have declined significantly since 2019 in the Twin Cities’ downtown cores, setting the stage for a financial reckoning that could force tough choices from developers, property owners and government officials in the years ahead.
According to the Minneapolis Foundation’s Downtown Next report , the 29 most valuable parcels lost 14.7% of their tax-assessed value between 2019 and 2023. Those properties alone provide 4% of Hennepin County property tax receipts. Downtown Minneapolis’ remaining commercial parcels deliver another 7% to county coffers.
The four-year decline in tax-assessed values likely understates the problem. Last summer, Minneapolis’ LaSalle Plaza at 800 LaSalle Ave. fetched less than $50 million at auction, a sharp discount to its $87.3 million tax assessment. In February, the Kickernick building at 416 First Ave. N. sold for $3.8 million, undershooting a recent $7 million tax assessment. In downtown St. Paul, the Cosmopolitan Apartments at 250 6th St. E. sold for $33.9 million earlier this year, according to a certificate of real estate value well under its $45 million tax valuation.
Assessed values will have to fall to meet the market, said Dan Collison, senior director of business development and public affairs for Sherman Associates, in an interview.
“It hasn’t been hard [for property owners] to prove through empirical data and market information that these properties are worth less now,” Collison said.
Falling commercial property values may affect TIF amounts, availability
Lower commercial property values mean less commercial property tax revenue, forcing local governments to make tough choices: look to other sources of revenue, such as sales taxes and residential property taxes, or cut city and county services.
Falling valuations also worsen an already challenging financing environment for property developers and building owners working in the Twin Cities’ urban core.
As property values fall in existing tax increment financing districts, developers have less “increment” funding to work with, said Jon Commers, principal at St. Paul-based
Visible City , an urban planning consultancy. Though the causes are different, Commers said the current situation echoes one that unfolded about 20 years ago, when the state of Minnesota reduced property tax class rates, he said.
“There was a lot of pivoting cities had to do to address that change,” he said.
With interest rates high, rent growth anemic, and financing partners wary, inadequate TIF funding is a potential project-killer. “If you can’t get TIF, in most cases you can’t build anything right now,” Collison said.
Projects not directly affected by value compression may run into a different problem, where the development parcel’s value remains too high for TIF funding to support the financing stack. This is a notable challenge for redevelopment projects in the downtown cores, particularly office-to-residential conversions, Commers said.
Even with its valuation reduced, “a downtown office building will still have substantial value,” he said. “So how do you get to a low enough base value that [TIF] is meaningful to support your work?”
A potential reduction in TIF amounts and availability could hinder revitalization efforts in the coming years. Without TIF helping to “gradually work [development projects] into the tax base” over long periods of time, many of those projects likely wouldn’t happen at all, reducing the baseline for future TIF funding, Collison said.
“It’s a bit of a cycle where the tax base has greatly been reduced, while at the same time if cities don’t put TIF into projects they won’t have a long-term fix” for the problem, he said. That’s especially true for multifamily projects, which is increasingly expensive to build and operate, he added.
A bright spot for conversions?
On the bright side, conversion projects that can find a way to use TIF are likely to see a “slight boost” from falling commercial property values, said Elfric Porte, director of housing policy & development for the city of Minneapolis, in an email.
That’s because, once stabilized, Class C office properties converted to residential use are likely to produce more value than if they’d remained offices. These buildings have smaller floor plates unsuitable for modern professional users and relatively straightforward to adapt for 24/7 inhabitants.
They also tend to be in poor enough condition to meet the “blight test” required by current TIF statutes, Commers said.
But that’s not the case for office buildings built in the 1980s and ’90s, which remain in decent condition but aren’t ideal for modern users. Commers pointed to “active conversation at the Legislature” about changing the
state law authorizing TIF to allow at least temporarily TIF to be used without a finding of blight. This could smooth the way for newer office buildings to be converted, which could benefit not only the core cities’ downtowns but suburban and outstate communities as well, he said.
Piecing together financing and policy
Lower commercial property values also complicate non-TIF financing. As stabilized properties’ net operating income declines and cap rates rise, lenders using them as comps may value new development proposals more conservatively than the developers.
Stabilized properties themselves face the same issue, with lenders demanding more equity as a condition of refinancing, Commers said.
For new development and adaptive reuse projects, developers often need to look at tax financing tools other than TIF,
New History founder and principal Meghan Elliott said in an email.
“The state of Minnesota has created some really powerful programs to incentivize housing creation, from DEED Redevelopment Grants to the new State Housing Tax Credit,” Elliott said.
Earlier this year,
Finance & Commerce reported on a proposed broader tax credit proposal modeled on the
Historic Structure Rehabilitation tax credit , which could finance up to 30% of qualifying expenses for certain building conversion projects. It’s not clear whether that proposal, known as the Conversion of Underutilized Buildings tax credit, will come to a vote this legislative session.
Another tax financing option is the
4d Affordable Housing Incentive , which the state legislature expanded last session.
4d is a valuable tool for developers “that can prevent some good properties from going upside-down,” Collison said. But because it reduces the tax rate on eligible properties, it could further crimp revenues at a time when assessed values are tumbling.
That raises the possibility that state and local legislators will look to new revenue sources or policy changes to preserve housing affordability and availability.
St. Paul’s
rent stabilization ordinance has been unpopular with developers since voters approved it in 2021, even after
city council amendments to soften its impact took effect last year. The Minneapolis City Council is considering its own rent stabilization ordinance, and while Collison believes city policymakers “are in a thoughtful moment and not moving aggressively right now,” developers and lenders remain hypersensitive to the issue.
At the state level, a
DFL proposal to tie rent increases in federally subsidized senior housing to Social Security cost-of-living calculations could be “devastating” for the segment, Collison said.
In the end, stabilizing the Twin Cities’ commercial property market and shoring up its tax base for the long term will require a thorough reimagining of the two core downtowns.
The Minneapolis Foundation’s Downtown Next Report offers a grab-bag of recommendations, including relocating skyway retail to street level and aggressively supporting adaptive reuse efforts. In a piece published last year in AIA Minnesota’s ENTER magazine,
Commers advised Minneapolis and St. Paul to “consider dramatic liberalization of downtown zoning and overlay districts to allow space to respond to new kinds of demand” around existing residential nodes like Lowertown in St. Paul and the North Loop in Minneapolis.
The value compression now occurring could help accelerate those efforts, Commers said.
“Over the next number of years, we’ll see more organic development of those residential nodes with buildings that include not only live-work spaces but a wider range of uses that become feasible,” he said.
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