Is the recent auction of the former Seven Steakhouse & Sushi building a hopeful sign for downtown Minneapolis’ struggling real estate market? It fetched far much more than its $500,000 starting bid and attracted significant interest from bidders.

The roughly 31,000-square-foot building at 700 Hennepin Ave. was awarded for more than its estimated fair market and assessed value in a February action, according to Erin Fitzgerald, senior director at JLL Capital Markets in Minneapolis, who has insider knowledge of the sale. Per tax data from Hennepin County, the building was last assessed at $3.6 million in 2023.

The two-story building last sold for $7.5 million in late 2017.

The transaction hasn’t officially closed yet. Fitzgerald declined to identify the awardee who’s in line to purchase the property.

Other downtown properties were acquired through recent auctions for far less than their assessed values. That includes Hempel Real Estate’s $46 million purchase of LaSalle Plaza, a 620,000-square-foot office building completed in 1991.

A closer look at the Seven building, a well-located property with two income-producing electronic billboards on its roof, suggests its still-in-progress sale isn’t representative of the broader market. But the difference between the estimated market value of three other buildings and their sale or list price in recent or upcoming  auctions – LaSalle Plaza, the Pence Building and the 330 South Second building – indicates the downtown commercial real estate market could remain troubled for years.

Three auctions, three data points

Hempel got LaSalle Plaza at a steep discount in an auction last June. The Eden Prairie-based firm acquired the building for just one-third of the $155 million paid in 2011 by the Teachers’ Retirement System of the State of Illinois, its previous owner.

Hennepin County valued LaSalle Plaza at $76.4 million in 2023, down from $87.3 million in 2022, according to property records. The latter figure is almost twice as much as what Hempel paid for the building.

The transaction’s “complexity” – namely separate mortgages for the land and the building – could have come into play, but the price nevertheless “indicates a significant decline in value from three or four years ago, and certainly from what lenders thought it was worth,” said real estate attorney Brian McCool of Fredrikson & Byron. He handles  complex commercial real estate transactions but wasn’t involved in the LaSalle Plaza deal.

Similarly, the nearby Pence Building was acquired last October by Hempel for $3.6 million, about half of its assessed value. The building last sold for $8.2 million in a February 2007 transaction that included multiple parcels.

Hempel could convert the historic 90,000-square-foot office building into housing, Axios previously reported.

LaSalle Plaza’s low selling price shows that “even some of the premier downtown office buildings are facing difficulty,” said Brad Williams, a commercial real estate attorney at Dorsey & Whitney in Minneapolis. The office market has seen a “flight to quality,” he said, as tenants with big pockets opt to move into brand-new buildings, like RBC Gateway and North Loop Green, when their leases are up. Plus, older properties will come under even more pressure as a wave of low-interest loans come due in the next couple years, Williams said.

Refinancing is unrealistic for some borrowers due to lower property values and higher interest rates. Another challenge for borrowers looking to refinance is that fewer banks overall are making commercial property loans in central business districts like Minneapolis’s, both due to lower property values and more technical issues within the banking industry, Williams said. Until last year, lenders tended to work with struggling borrowers to find solutions short of foreclosure or forced sales, but “the days of ‘extend and pretend’ are coming to an end,” Williams said.

That seems to be the case for the 202,000-square-foot office building at 330 Second Ave. S, which last sold for $20 million in 2018. The starting bid for the March 19-21 auction is $3 million, about 80% less than the last sale price, but the seller is likely hoping for far more than that, Fitzgerald said.

Built in 1980 and renovated in 2019, the most recent Hennepin County tax assessment valued the property at $15.3 million.

Though a winning bidder could feasibly get the building for a fraction of what it’s worth,  Fitzgerald said she’d be “surprised” if the building sold this month.

“I haven’t spoken with anyone who can see the potential there,” she said. “There’s a lot you can get” for an amount closer to $15 million than $3 million, she added.

The 330 South Second building isn’t very attractive as an investment property, with middling-quality office space, nor is it a suitable candidate for a residential conversion due to its floor plates.

In a different market environment, such buildings might attract developers looking to tear them down and build from the ground up, said Dan Collison, Senior Director of Business Development and Public Affairs for Sherman Associates. 

But demolishing a big office building is expensive enough that it might not make sense in a challenged market, Collison said, adding that the City could be reluctant to permit a vacant block-sized lot for any length of time downtown. As a result, some buildings in this category “could languish for quite some time,” especially if they’re purchased by “nameless, faceless entities with no real plan for them,” he said.

Fredrikson’s McCool said the 330 South Second building . could attract a developer looking for a “covered land play.” In that scenario, a buyer snaps up a parcel believed to be a “few years out” from supporting ground-up development, he said, and the property generates enough income in rent to cover carrying costs in the meantime.

“That allows you to wait for the right market conditions and be more thoughtful about redevelopment,” McCool said.

Seven Steakhouse: The exception that proves the rule?

A version of what McCool described could be taking shape with the Seven building. 

Though its roof is in serious disrepair, more than a dozen groups bid on the property, according to Fitzgerald.

As the auction process played out, the potential value of the property’s billboards became clearer. The income from the billboards could be worth more than the land and building themselves, which would reduce any future owner’s carrying costs as they worked to fix up and lease the property, Fitzgerald said.

“Even if they don’t have a plan going into it, that’s an easier path forward for an investor,” Fitzgerald said.

Fitzgerald is seeing more buyers looking for alternative income streams on commercial properties, including billboards and solar panels. With low demand for office space and signs of overbuilding in the industrial market, “investors are asking what else these buildings can be used for,” she said.

“Still in price discovery”

These recent and upcoming downtown auctions are important data points for Minneapolis’ commercial market, but they don’t tell the whole story. 

Many distressed properties never hit the auction block, instead changing hands through foreclosure, forced sales, or voluntary transfer back to the lender. These channels offer access to a broader range of potential buyers, some of whom avoid auctions due to the shortened due diligence period and other shortcomings, McCool said.

“Historically, auction buyers are only one subset of buyers out there in the overall market,” he said. 

The limited buyer pool means auction properties often sell for less than they’d fetch from a “full-on marketing” process, McCool said. Fitzgerald noted that competitive auctions can also trigger “emotional” bidding that results in a higher selling price.

But some downtown properties subject to full-on marketing aren’t doing so well. 

A small office building at 727 Hennepin Ave., not far from the Pence Building, recently fetched less than 60% of its most recent tax assessment. Despite that, Fitzgerald characterized the sale as “strong.” 

Last month, United Properties sold the Kickernick Building at 430 N. First Ave. for $3.8 million, which is only 20% of its 2017 sale price. That price tag is about half of the property’s value determined in the most recent tax assessment. 

Ward 3 Councilmember Michael Rainville, who represents Downtown East and West, singled out the disappointing Kickernick sale  in a recent newsletter to constituents. “That $16 million drop in value means every renter and homeowner in Minneapolis will have to pay higher rent or property tax to make up the difference,” he wrote.

The Soo Line Building, an early office-to-residential conversion, “can be purchased for an approximately 50% discount to its replacement cost,” according to a marketing brochure, which doesn’t reveal a listing price or a replacement cost.

These sales and listings are indicative of a market that’s “still in price discovery” mode, Fitzgerald said.

As more commercial loans come due and office vacancies rise amid a durable shift to remote or hybrid work, it’s likely that the price discovery process will continue for some time, Dorsey’s Williams said. Historically, major commercial real estate downturns have taken a decade to work out, so “it might be 2030 before we see a new equilibrium,” he said.

In the meantime, lower property values and cautious lenders raise doubts about ambitious downtown development proposals. 

Sherman is planning a $400 million mixed-use project called Washington Yards at 255 2nd Ave. S, where a vacant Wells Fargo office currently sits. The Minneapolis-based developer acquired the site spanning a full city block for $6.4 million in 2022, according to property records. However, the 550,000-square-foot building won’t be demolished until the company secures financing for the redevelopment, the Minneapolis/St. Paul Business Journal reported.

That’s proving trickier than anticipated in this market. While ground-up development “is still Plan A” for the Wells Fargo site, the company is considering renovating and reusing the existing building “if the market doesn’t allow [for the Washington Yards plan as is] or if there’s a great use for what we have there now,” Collison said.

“Something really exciting could be done in this building with the right user,” he said.

Lower downtown property values could also destabilize Minneapolis' tax base in the coming years, putting more financial pressure on homeowners and small business owners. A significant decline in downtown property tax assessments would force the city to raise residential property taxes or cut back on tax-funded city services.

Last year, the Minneapolis Foundation’s Downtown Next report found that 99.9% of Minneapolis commercial property tax revenues come out of the downtown core, and 36% from downtown’s 29 highest-valued parcels. Those 29 parcels’ assessed values declined by 14.7% from 2019 to 2023, reflecting distressed sales and valuation appeals, according to the report. 

But that’s likely only the beginning. With a wave of foreclosures and auctions expected in the next few years, “the reduced tax chickens have not yet come home to roost,” the report said.