How property tax hikes will impact commercial real estate

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Property taxes are likely to rise in Minneapolis and St. Paul following budget proposals from the mayors of both cities that included property tax levy increases of about 8%.

A tax increase is likely to have a bigger impact on owners of industrial and residential properties in the Twin Cities, as many office buildings suffer from low occupancy and falling property values.

St. Paul Mayor Melvin Carter presented a budget that would require a 7.9% property tax levy increase during his Tuesday speech, while Minneapolis Mayor Jacob Frey proposed an 8.1% property tax levy increase at his Wednesday speech.

Andrew Babula, the director of the real estate program at the University of St. Thomas, said office buildings in the downtown cores are facing two pressures when it comes to property taxes — a downward pressure on market value as a result of rising vacancies while the levy amount is an upward pressure.

“It just depends on which one has a bigger effect,” Babula said. “I think it will vary by each building because certain office properties, particularly those that haven’t been as successful in maintaining occupancy — usually that’s going to be older properties, not as well positioned, that don’t have amenities.”

Though a building with 8% to 10% property tax levy increase paired with a 25% to 40% drop in market value, Babula said property taxes overall are still likely to go down.

In a statement given to Finance & Commerce, BOMA Minneapolis President Sarah Anderson said a property tax increase in Minneapolis along with historic difficulties in the commercial real estate space such as “sky-high interest rates” is cause for concern because it will impact “our ability to recover and be viable.”

“We hope in the coming months, city leaders will develop a budget that recognizes these challenges and focuses on efforts to bring vibrancy to our community,” Anderson said.

Cecil Smith, the president of the Minnesota Multi Housing Association said in a Wednesday interview that there is “a real nervousness” among landlords about property tax increases in both cities, but across the metro broadly.

“Housing providers have seen really significant inflationary effects on their operations, insurance, wages, property taxes,” Smith said, adding that the market has brought sluggish rent growth. “Property tax increases coming down for next year, that’s going to be very difficult to manage.”

How property taxes shift throughout the metro is likely dependent on the size of the city, Babula said. Minneapolis and St. Paul are uniquely at risk because their downtown cores have so much office space.

“Still, suburbs will still feel an impact and their budgets are smaller, but on a percentage basis, they could be seeing similar impacts,” Babula said.

This move by Carter and Frey is not unexpected. In May during his State of the City address, Frey said the drop in value among office buildings downtown has led to a budget shortfall and he warned this year was not one to “add shiny new programs” but rather to utilize the existing ones.

Frey said during his Wednesday speech that the maintenance of current programs was initially estimated to require a double-digit increase, something he called “acceptable to nobody.”

For St. Paul specifically, Babula said the likely reason for needing such an increase to the levy, its likely to offset inflation which has driven up the cost of city services as well as to account for the city spending more on housing programs and downtown revitalization efforts.

Carter, during his speech, made the argument for spending on the “All-In Housing” framework of investments like expanding downpayment assistance and supporting the study of office-to-multifamily conversions.

Minneapolis industrial values up, office, residential falls

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