MINNEAPOLIS — When the Minneapolis St Paul Business Journal published a story about a downtown Minneapolis office tower selling at a 91% discount off its price from just five years ago, it turned plenty of heads.
"It's very difficult to wrap your head around that erosion in value in that relatively quick period of time," said Ari Parritz, founder of Afton Park Development.
Parritz is referring to the sale of the Forum office towers, which sold for $6.5 million last week. The building previously sold for $73.7 million in 2019.
"Taking that much value off the property tax roles is significant and if you're a homeowner in either city, you wonder, when is this going to start to hit me," Parritz said.
It's also just the latest example of a steep discount on a big piece of commercial real estate in downtown Minneapolis. According to the same MSPBJ report, the Kickernick building in Minneapolis sold for 80% less than its previous sale, and last year, LaSalle Plaza nearby sold for 70% off.
"It's a necessary part of the process in going through and righting the markets," said Andrew Babula, director of the real estate program at the University of St. Thomas.
Babula said the downtown market is still adjusting to the big drop in demand for office space during the pandemic and the steady increase in vacancies as leases have expired in the years since.
While some developers are investing in ambitious office-to-residential conversions in those empty spaces, Babula and Parritz both point out that many buildings still just don't make sense, or cents, to convert.
"Certainly if you can buy it at a lower cost, you can afford to put more money into it and you can overcome some of the those challenges," Babula said. "But a lot of them, just the nature of the buildings don't allow for a conversion like that."
So far, it's unclear what the new owners of the Forum Towers might have in mind, but the price does expand their options.
"They're now gonna have some flexibility in what to do with that tower," Parritz said. "The first option is to try to bring in new tenants. The only way to do that creatively now is to basically make the space as inexpensive as possible. There are still people looking for office space, but they've got a hundred options for every tenant that's looking. So how do you become like the most attractive option? Well, you could be the cheapest option for one."
Parritz said he has more concern about what might happen across the river in St. Paul. The St. Paul Athletic Club recently went to auction but didn't sell. Neither has the large portfolio of office buildings owned by Madison Equities, which has been on the market for months.
"I think for downtown Saint Paul in particular, which is somewhat unique from downtown Minneapolis, is trying to answer the fundamental question of what is driving people to want to be there?" Parritz said. "I think downtown St. Paul is still working on that. And there's a lot of really, really, really good work being done, but I'm not sure there's a clear answer yet."
"Downtown Minneapolis is adjacent to the hottest neighborhood in the Twin Cities area in the North Loop, so it can basically kind of feed on the activity of the North Loop and create some deeper connections than it has had before."