Downtown St. Paul's office market situation is more dire situation than previously known

When downtown St. Paul's largest landlord put its entire portfolio up for sale last month, it revealed that the city's already delicate office market is in an even more dire condition than many realized.

Why it matters: The situation might soon get worse, because the neighborhood's biggest user of office space, the state of Minnesota, has a plan to move many of its 6,000+ workers out.

• This would mean fewer people eating, drinking, and hanging out downtown, but the loss of a major tenant can also shrink a building's value and ultimately shift more property tax burden onto homeowners.

The intrigue: Madison Equities this spring hired commercial real estate brokerage CBRE to help sell its 1.6 million-square-foot office space portfolio after the St. Paul company's leader, Jim Crockarell, died earlier this year .

• As part of its pitch, CBRE sent out an "offering memorandum" or O.M., which specifies every tenant in every building, how much those tenants pay in rent, and when their leases expire.
• Several industry professionals told Axios they were surprised by the move. It's almost unheard of to send such documents without requiring a signed confidentiality agreement in advance.
• Madison and CBRE did not respond to requests for comment.

Zoom in : The O.M. doesn't paint a pretty picture. Madison's buildings are roughly 50% occupied, and some of its biggest tenants' leases expire in the next two years.

• U.S. Bank, for example, is departing the U.S. Bank Center and moving to the city's west side, leaving behind 113,000 square feet.

Plus: The documents reveal about 610,000 square feet of previously unknown vacant space, according to an Axios analysis.

• The annual report of the St. Paul Building Owners and Managers Association (BOMA) showed a 22.5% office vacancy as of last summer, but that was because Madison had self-reported its buildings as mostly full, BOMA president Tina Gassman told Axios.
• Factoring in the company's empty space, the downtown vacancy rate was actually 31.5%.

St. Paul's top tenant pulls back

St. Paul has always been known as a government town, with a large presence of city, county, and regional workers.

Yes, but: None of them employ as many downtown office workers as the state of Minnesota, which occupies well over 1.3 million square feet.

State of play: That number is about to shrink, perhaps dramatically.

• The state's new strategic plan, drawn up by consultants in late 2022, recommends consolidating agencies to the Capitol Complex, a series of state-owned buildings outside of downtown.

The latest: Minnesota has put out a request for proposals for new office space for the Department of Commerce, currently based in the Golden Rule Building.

• As of 18 months ago, 340 workers were assigned there, per state documents.

Several state agencies are in the process of consolidating their existing offices in the Capitol Complex, which could free up space for Commerce and other departments, said Wayne Waslaski, who heads up real estate for the state.

• Waslaski said that with remote and hybrid work, Minnesota doesn't need as much space and the strategic plan will lower real estate costs per employee, which falls between $5,000 and $6,000 annually in privately owned space, according to the consultants' report.
• While moving those workers to the Capitol is an option, Waslaski said they could also stay downtown.

What they're saying: Gassman, who leads the BOMA organization representing landlords, understands the state's reasoning, but warned that outfitting the Capitol buildings will be expensive. She questioned how much money, if any, the state would ultimately save.

• Beyond the dollars, the loss of state workers would also hurt downtown, she said.
• "When you're looking at (downtown) buildings all of a sudden being half empty that were once thriving with good management, that's a huge impact on the vitality of the city."

What we're watching: Most of the state's leases downtown will expire in the next four years.

• The Department of Human Services and the Department of Natural Resources leases expire in 2026. Their nearly 1,800 workers occupy about 420,000 square feet, combined.
• Those departments have not begun the formal process of finding new space.

The bottom line: Waslaski said the state will always have employees working in downtown St. Paul and noted a handful of agencies have long-term leases in the city center.

• But with the rise of working from home, he added, consolidation of public and private office space is happening across the country and world.
• "The industry as a whole has been turned upside down."

Sign up for Axios Twin Cities for free.