The commercial real estate market is in the doldrums across much of the U.S., but it is especially bad in some places. Like Minneapolis. John Phelan relates the bad news:
Last week, the Minneapolis/St. Paul Business Journal reported:
Two downtown Minneapolis office towers have sold in a deal representing one of the core’s steepest discounts in recent history.
The 634,000-square-foot Forum buildings, previously known as International Centre and Oracle Centre, sold last week for $6.5 million, according to a real estate filing with the Minnesota Department of Revenue published Monday afternoon.
The price is about 91% lower than the property’s last sale, at $73.7 million in 2019.
Ponder that: the buildings have lost 91% of their value in five years.
Neither is this a one off:
Some of the other major discounts of office buildings in and around the CBD have included the Kickernick Building and LaSalle Plaza, which sold 80% and 70%, respectively, below their last purchase prices.
This means that Minneapolis’s tax base is going up in smoke:
As commercial property prices tank so, too, do their values assessed for property tax purposes. The Business Journal reports that “Combined, the towers have an assessed value of about $30 million, according to Hennepin County property records” and notes that “The sale has the potential to set a new benchmark in downtown Minneapolis’ office landscape, which already has been facing volatile market conditions, such as tenant downsizing, heightened interest rates, loan maturities and falling values.”
And, as assessed commercial property prices are dragged down so, too, are commercial property tax revenues. This is hammering city budgets and pushing leaders to hike residential property taxes to fill the hole.
Commercial real estate bears a disproportionate share of the city’s fiscal burden. As those values decline dramatically, the short-term fix will be increasing residential property taxes. That will reduce residential real estate values, and drive more upper-income residents out of the city. Which could turn into a financial death spiral.
Why are Minneapolis’s problems so acute? Because of crime. Formerly a low-crime city, the George Floyd riots and accompanying attacks on law enforcement have caused a dramatic increase in the rate of serious crime. That has caused businesses, as well as individuals, to avoid the city. With leases continuing to expire, there is no reason to think the downward trends have bottomed out.
The City of Minneapolis, meanwhile, is exploring ways of redeveloping George Floyd Square in a manner that will, in the mayor’s words, “honor the life of George Floyd, and point toward a more equitable future.” Somehow, I don’t think that is the focus that the city needs if it is to recover economically.
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