The largest private property owner in downtown St. Paul has put 10 of its commercial properties up for sale, including six office buildings, raising deep questions about the future of some of the city’s most storied commercial buildings, including some 1800s-era Lowertown structures neighboring Mears Park.

Some civic leaders have expressed optimism that new owners could bring fresh vision, overdue upkeep and investment. However, against the backdrop of remote work and high interest rates, financial observers predict slow going in a tough era for the office sector.

“If it was to be sold in a bulk sale, a portfolio sale, you have to think how big that buyer would have to be. You’d have to be a massive player,” said John Rent, a commercial real estate lender based in downtown Minneapolis. “And institutional buyers are mostly on the sidelines now. To the extent they’re active, they’re engaged in industrial properties and multi-family properties.”

Madison Equities listed the commercial properties — comprising more than 1.6 million square feet in commercial space — this past week through brokerage CBRE, including the iconic First National Bank building, the Park Square Court building, the 1890s-era Empire Building, the Alliance Center and two parking ramps.

Occupancy rates

With U.S. Bank poised to leave the 26-story U.S. Bank Center by October except for a skyway branch, occupancy rates in those commercial buildings average 50% or less and dropping. In some cases, estimated market values calculated by the Ramsey County assessor’s office list building values at or even below where they were a decade ago, when the office market was still re-emerging from the Great Recession.

Also on the market is the Handsome Hog restaurant at Selby and Western avenues, as well as the vacant lot next to it. Madison Equities did not list its residential properties such as the Lowry Apartments and Seventh Place Apartments as part of the sale offering.

In its 49-page offering memorandum, the company expressed interest in finding a buyer willing to acquire all 10 properties at once, though the company indicated it reserves the right to entertain purchase offers for individual properties. No preferred sale price was given, but the memorandum indicated offers would be considered well below replacement costs.

“It could be good, it could be bad,” said Jason George, business manager with the International Union of Operating Engineers Local 49, which represents heavy equipment operators, mechanics and stationary engineers in the construction industry, in a social media post.

“Two things are certain,” George wrote. “When sold for far less than their current property tax valuation, it will drive down valuations all over downtown and hit (the city) budget hard. And it will take tremendous vision and leadership from (the) city to make a good outcome happen.”

Challenges to owning office space

How realistic is it that one buyer will pick up some of the largest office towers in post-pandemic downtown St. Paul in one swoop?

In the era of remote work, “office of all types remains a distressed and out-of-favor product type,” Rent said. “It would set off alarm bells with (a buyer’s investors): ‘You’re carrying how much square footage in downtown St. Paul?’ … They’re going to want properties diversified across property types.”

Not helping matters is the amount of deferred maintenance visibly evident in some of the properties. Even a buyer eager to acquire all 10 at a low price, spruce them up and then flip them over, one by one, to new buyers at a higher price would face significant maintenance costs and other holding expenses, according to developers and others close to the commercial real estate industry.

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Residential conversions are possible, but they generally rely on low-income housing tax credits, tax increment financing, environmental remediation grants or some other combination of public-sector assistance. That funding could be essential to make the project worthwhile financially as a developer installs a bathroom in each new housing unit and brings century-old architecture up to livable standards.

In short, conversions “take time and are done on a one-off basis,” Rent noted.

“It’s going to be a slow slog,” he added. “Some of it would be converted to residential, hopefully. Some of it could be demolished — who knows?”

Looking out longer term, Rent and others in the industry are watching to see how much each individual building sells for. With office values already sinking, a major property devaluation could have chilling impact on the city budget, with repercussions for property taxpayers citywide.

“Every dollar that’s lost from reduced valuation on these towers is going to end up being made up for by either other commercial property owners or residential property owners in the city, if not Ramsey County,” Rent noted. “To the extent the tax value goes down, everyone else’s taxes go up.”

Still, “If I were in their shoes, and there’s an offer on any of these, I’d take it,” he said.

Here’s a look at the 10 properties:

First National Bank

The flashing “1st” sign atop the century-old, 32-story office tower has become synonymous with the downtown St. Paul skyline. Located at 332 Minnesota St., the First National Bank building spans nearly 663,000 square feet of office space, of which about 45% is occupied, according to the CBRE sales offering. Tenants include Wold Architects, Finance and Commerce, the Social Security Administration, the Ramsey County Bar Association and a variety of law and financial firms. The building was constructed in 1915 and renovated in 1931 and 1970. It carries an estimated market value of $30.4 million, according to Ramsey County property tax records. The First National Bank building was sold to Madison Equities in 2015 for $37.25 million.

Alliance Center

Located at 55 E. Fifth St., the 16-story Alliance Center spans 300,000 square feet of commercial space and is about 44% occupied, according to the sales offering. As tenants go, Southern Minnesota Regional Legal Services and a new Brazilian restaurant, Jackey’s Peg Leg, have a sizable presence, but Alliance Bank recently moved its bank branch out of the building that bears its name and into Wells Fargo Place on East Seventh Street. Other major tenants have, until recently, also included the accounting firm Red Path, which has relocated its headquarters to the Securian Financial building. Alliance Center was constructed in 1967 and renovated in 2012. The building carries an estimated market value of $8 million. It was sold to Madison Equities in February 2020 for $4.1 million.

375 Jackson Square

Located a block from Mears Park at 375 Jackson St. and 135 Fifth St., the two-building campus dubbed 375 Jackson Square spans 238,000 square feet and is 53% occupied, according to CBRE. It has long attracted government offices such as St. Paul’s Department of Safety and Inspections and the U.S. Department of Agriculture, though the latter is now leasing month-to-month. The older building was constructed in 1965 and the newer structure was built in 1979. The structures, last renovated in 2002, carry an estimated market value of $3 million and $3.6 million, respectively, and were last sold in July 2007 for $13.6 million.

U.S. Bank Center

The 26-story U.S. Bank Center is located at 101 E. Fifth St. and is 58% occupied, according to CBRE. Spanning 522,000 square feet, it was built in 1973 and last renovated in 1995. Major tenants include U.S. Bank, which is exiting some nine floors when its lease runs out in October, though a skyway bank branch will remain in place. Other major tenants include Nexstar business training, the St. Paul Foundation and the Bush Foundation. The office tower has an estimated market value of $21.7 million, according to Ramsey County, and last sold in November 2013 for $21 million.

Empire Building/Endicott Arcade

Walk a straight line down Fifth Street from Rice Park to Mears Park and the eye can’t fail to take in the 1800s-era building with the distinctive sandstone and red brick facade. Located at 360 N. Robert St., the seven-story Empire Building was constructed in 1889 and last renovated in 1990. It spans 97,000 square feet. Once known as the Manhattan Building and the Capital National Bank Building, it carries an estimated market value of $1.2 million and was last sold in July 2011 for $700,000. The building is being marketed alongside the adjoining Endicott Arcade annex building on Fifth Street. Both structures sit vacant.

Park Square Court

Located at 400 Sibley St., the 1890s-era Park Square Court building spans 136,000 square feet of commercial space opening onto Mears Park. It currently lacks any tenants. According to the sales offering, the five-story building is “shovel ready for a hotel redevelopment,” with all the necessary governmental and regulatory approvals, though plans for a boutique Marriott Tribute hotel fell through around late 2018. Previous restaurant tenants have included the Handsome Hog, Noyes & Cutler and the Big Biscuit Bar. Park Square Court carries an estimated market value of $7.6 million. It was last sold in November 2005 for $6.8 million.

Stadium Ramp

The Lowertown parking ramp at 245 E. Sixth St., adjoining the River Park Lofts, spans 230 stalls and 172,000 square feet just around the corner from CHS Field, the home of the minor league St. Paul Saints. Built in 1960, the six-story ramp carries an estimated market value of $1.89 million and last sold in 2010 for $750,000. Recent tenants have included the now-shuttered Ox Cart Ale House, an arcade-themed restaurant with a rooftop patio overlooking the ballpark.

Capital City Ramp

The 10-story parking ramp at 50 E. Fourth St. features an entrance on Fourth, near the Green Line’s Central Station, and an exit around the corner on Minnesota Street. Built in 2000, it has 946 stalls and 444,000 square feet. The ramp, which sits next to the historic Minnesota Building, an apartment building, carries an estimated market value of $10.5 million and last sold in May 2022 for $7 million.

Handsome Hog

Located at the corner of Selby and Western avenues, the one-story building at 173 N. Western Ave. houses the Handsome Hog, a contemporary Southern-themed restaurant once associated with celebrity chef Justin Sutherland, who had at one time expressed interest in buying it. The building spans 13,800 square feet and is listed as 83% occupied. About 1,400 square feet is listed as vacant. The structure, built in 1963, carries an estimated market value of $1.9 million.

Surface parking lot

Also for sale is the surface parking lot neighboring the Handsome Hog. Located at 401 Selby Ave., it spans 3,200 square feet. The lot carries an estimated market value of $186,000 and last sold in 2018 for $775,000, when it hosted a former St. Paul Urban League building built in 1959.

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