Twin Cities office towers are in trouble

Owners of some of the most expensive office towers in the Twin Cities are choosing to walk away from their properties instead of continuing to make loan payments.

What's happening: The 30-story LaSalle Plaza in downtown Minneapolis is scheduled to go to auction next week after the previous owner, the Teachers’ Retirement System of the State of Illinois, avoided foreclosure by transferring the building to its lender, Northwest Mutual.

Nearby Fifth Street Towers is facing the same fate and may also go back to its lender this month, according to Axios' sources who were not authorized to discuss the matter.

• Real estate experts predict more distressed office properties will follow suit, in Minneapolis, St. Paul and the suburbs.

Why it matters: Commercial properties make up nearly 30% of property taxes collected by Minneapolis. Auctions like the one for LaSalle Plaza will likely reduce the value of office towers, dealing a blow to the city's tax base.

• "Anytime commercial values plunge downtown it's bad news for people who pay apartment taxes and homeowner taxes," Steve Brandt, a member of the Minneapolis Board of Estimate and Taxation, told Axios.

What we're watching: Real estate analytics firm Trepp is keeping tabs on IDS Center — the city's most iconic office tower — due to a 77% occupancy rate and the loss of Nordstrom Rack from Crystal Court, said senior managing director Manus Clancy.

Catch up quick: The pandemic and rise of remote work dealt a major blow to the Twin Cities office market, raising vacancy rates to 25%, according to commercial real estate firm Cushman & Wakefield. Office tenants have been shedding space as workers come in less frequently, or not at all.

Between the lines: Minneapolis began lowering tax valuations for downtown office towers in 2020. As a result, the tax burden has begun shifting slightly onto residential property owners.

What they're saying: Steve Cramer, CEO of the Minneapolis Downtown Council, is warning city council members that if they don't pay attention to the health of the downtown office market, things will get worse for homeowners.

• Homeowners haven't yet seen huge tax increases thanks in part to the American Rescue Act, but Cramer cautions that money will be "gone by the end of 2024."