When Madison Equities placed a series of vacant and semi-occupied St. Paul office buildings and parking ramps on the market together this spring, some observers feared the ramifications may extend beyond downtown.
If the 10 buildings sold for a pittance, wouldn’t that lower market values for all the other office buildings across downtown? And generally speaking, don’t lower market values yield lower property taxes?
If that’s the case, homeowners throughout St. Paul could feel the effect down the line through higher property taxes, after absorbing a larger share of the city’s tax burden to make up for the loss in downtown values.
Given widespread reports that the buildings need care and maintenance, Madison Equities’ portfolio “could have a real chilling effect on our property values downtown,” said St. Paul Mayor Melvin Carter, in an interview last week.
“And if our values and property tax collections dip downtown, then (the taxes) go somewhere else,” said the mayor, emphasizing that many downtowns across the country face similar challenges in the post-pandemic era of remote work. “We have to invest in downtown, not just as an investment in downtown, but because we’re all connected in this web.”
The Alliance Bank Center building in downtown St. Paul, as seen on Wednesday, May 8, 2024, is among the buildings Madison Equities is selling. (John Autey / Pioneer Press)
Downtown values
Still, the mayor acknowledged that the reality could be much more complicated.
That’s in part because a lot of downtown St. Paul office value is already encumbered in tax increment financing districts, where a large share of property taxes are spent within the district. It’s also in part because of how valuations are processed for commercial properties — especially for “distressed sales” of foreclosed properties and other buildings sold at a loss.
Those values typically aren’t taken into account at all when determining market values in a specific neighborhood, according to Ramsey County officials. In fact, downtown office values — which have not commanded high rents in years — have held fairly steady in recent years.
For the Madison Equities properties, “it’s our understanding that they’re being marketed as distressed properties,” said Corey Erickson, deputy Ramsey County assessor. “They have below-market occupancies, and below-market rents. Whenever they do sell, they’re going to be off-market sales. When that happens, we don’t use a property to set (values for surrounding properties).”
Ramsey County Assessor Patrick Chapman agreed.
“A lot of this transaction is going to happen outside of the typical market,” he said. “If they sell a bunch of them together, that bulk sale would be deeply discounted.”
Park Square Court in downtown St. Paul on Wednesday, May 8, 2024. Park Square is among the buildings that Madison Equities has put up for sale in downtown St. Paul. (John Autey / Pioneer Press)
Predictions are tough
Whether the entire Madison Equities portfolio qualifies as a distressed sale remains to be seen.
In its memorandum of offering, the seller has advertised all 10 properties together en masse, but if the right buyer comes along, it’s possible that the company may splinter off a particular building or two from its sale offering, such as the First National Bank Building, Alliance Center or U.S. Bank Center, and sell those separately from the group.
Given that Madison Equities only recently acquired some of the properties it’s now attempting to sell, “the loan amounts are likely exceeding the values on the properties,” Erickson said. “In a situation like that, you’re more likely to accept a lower sale price.”
Chapman and Erickson are quick to point out that assessors are experts at looking backward, not forward, and dislike making predictions about how market values will play out in the future.
“As appraisers, or assessors, we’re historians,” said Chapman, in an interview Wednesday. “For the 2025 values we’re working on right now for the taxes payable in 2026, we’re seeing kind of a stable environment down there (in downtown St. Paul) right now. There’s small increases and decreases.”
“With the Madison Equities (portfolio), what’s going to happen, we’re still a couple of years away from figuring out what that would be,” he added. “We’re still a little ways off from figuring it out.”
For now, the dominant reality in the downtown real estate market is that nothing is changing hands — commercial or residential.
Beyond the sale of the Cosmopolitan Apartments in Lowertown this year to Bigos Management, “there’s been very few sales of multi-family (buildings). There’s been very few sales, period,” Erickson said, while declining to predict how that might impact future values. “We are historians. We really try not to be in the forecasting business.”
Values hold steady
For now, rather than plummet, the estimated market value for downtown St. Paul office space this year constitutes a larger share of the downtown tax base this year than last year or the year before, largely because apartment values downtown have dipped somewhat in light of higher expenses.
In 2022, about 24% of the city’s downtown tax base was considered office space. In 2023, that dropped slightly to 23.7%, according to the assessors. As of January, for the purpose of calculating taxes payable in 2025, office space values constituted 24.7% of downtown values.
To determine the estimated market value of a single-family home or duplex in a typical St. Paul neighborhood, the county assessors use software that can quickly examine five recent, comparable sales in the same area to see if values are going up or down, and by how much. Evaluating how much value commercial properties and large, multi-family apartment buildings have gained or lost is more complicated. Potential income — how much revenue could the building generate through rents? — factors in heavily, but a long checklist of other factors is also considered.
For those larger properties, the assessors attempt to contact every buyer, and then most sellers, to interview them for a formal sales review, which helps inform their financial assessments. Key questions surround capitalization rates — a metric used to evaluate real estate investments by comparing their potential value and risk level to other properties. Those cap rates are calculated by dividing a property’s net operating income, which are mostly its rents after expenses, by its market value.
“Market values on apartments went down more than commercial, because of increased capitalization rates,” Erickson said. “And the other things were expenses have gone up for all properties, but it seems like it’s hit apartments a little more. For apartments, we would consider that to be more short-term, temporary. When interest rates begin to decrease, hopefully, we’d expect to see that (trend resolve).”
Residential transition
The two assessors see some bright spots for downtown St. Paul.
Judging by recent sales, market values for office buildings in downtown Minneapolis have fallen heavily, leading to some soul-searching across the river about possibly converting more office buildings to residential units. St. Paul has more experience in that area, given that former office buildings such as 345 Cedar St., the Custom House, the Rossmor Building, the Great Northern and other properties have long made the transition to residential.
“St. Paul has been doing this for a long time,” Chapman said. “We’ve been transitioning to residential for a long time. St. Paul is comfortable in this space.”
St. Paul City Council member Rebecca Noecker now co-chairs a downtown real estate committee with Chris Hilger, the chief executive officer of Securian, which is examining how to jump-start more office-to-residential conversion. The effort, which also includes the St. Paul Port Authority and the Bush Foundation, is taking a close look at the Madison Equities portfolio, and examining downtown building by building, Noecker said.
Inspired by the Downtown Alliance’s “Downtown Investment Strategy,” the scope of work “has broadened as a result of Madison Equities’ portfolio,” said Noecker on Wednesday.
Candidates for residential conversion
Among the key candidates for a residential conversion would be the government building situated across Fourth Street from St. Paul City Hall, known as the City Hall annex building. The mayor said this week that he plans to hire a consultant to look at potentially transitioning the annex building for sale to the residential market, which would allow the city to consolidate some offices or rent space in office buildings downtown.
“We’re actively talking about converting that into housing,” Noecker said. “I think it would be a great prospect for housing.”
Compared to Minneapolis, those conversions are generally more easily done in downtown St. Paul, where it’s not as hard to offer daylight because many small offices already have windows.
“Our buildings have smaller floor plates than, say, in downtown Minneapolis,” Chapman added. “They’re more susceptible to transition. Some of the properties that could be impacted can transition to residential a little bit easier. The bigger buildings, they’re hard to make residential because they’re so expensive.”
Added Erickson, “You need natural daylight.”
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