The tale of two cities’ assessed property values

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Star Tribune reporters recently informed readers about the disparity between Minneapolis and St. Paul residential property assessments (“Downtown St. Paul property values down, residential values up,” April 17). In Minneapolis, the residential tax base dipped 1.3%. In St. Paul, every neighborhood’s median-value home rose in value, except downtown, rising anywhere from 1.2% in Payne-Phalen to almost 6% in West Seventh.

At first glance, the contrast seems to paint a picture of a faltering Minneapolis market, while St. Paul ranges from slight to more robust growth. I suggest the picture is more complex, but still worrisome.

The factors that prompted the decline in Minneapolis values were the same as those in St. Paul: a shrinking pool of listings and especially high interest rates, at least by recent standards. So why did Minneapolis fare worse?

The slump in Minneapolis home values was felt particularly hard in some of the city’s higher-priced wards. The tonier lakes-area Ward 7, with a $390,000 median value, fared the worst among the city’s political subdivisions, with a drop of 8.8% in the median home value. The southwestern Ward 13, which boasts the highest median home value at $518,000, dropped by almost 1%. My assessment elsewhere in southwest dropped 5%.

In contrast, just two wards, both on the North Side, recorded the only gains in the city in median home value. Ward 4, with the lowest median home value at $226,000, saw values rise by more than 2%. Next-door Ward 4, with the next lowest median value, rose by 0.7%.

St. Paul’s citywide median home value increase of 2.95% was hardly much to get excited about, but it did go up. But St. Paul’s median value of $272,200 is much less than the Minneapolis median of $323,000. And that’s why the two cities differed.

Lower-value homes held to their values better because there’s more buyer demand for more affordable houses, especially when higher interest rates put monthly payments for higher-value homes out of the reach for more buyers. (As an aside, those of us who took out mortgages in the mid-1970s at 8.5% — even higher than today’s run-up — considered ourselves lucky a few years later when mortgage rates shot up to 12%.)

No doubt, Minneapolis is in for some tough sledding. All three legs of the city’s tax base stool shrunk. Besides the residential dip, the aggregate market value of the city’s apartments dropped by 9.5%, excluding new construction. Fortunately, that new construction, much of it stimulated by the city’s 2040 Plan, roughly offset that shrinkage. Meanwhile the commercial tax base shrunk by 8.7% or over a billion dollars. That’s largely driven by the black hole of downtown commercial real estate, where the tax base plunged 13%.

How long will these conditions persist? The residential and apartment markets seem likely to rebound once the Federal Reserve starts trimming interest rates. Indeed, more recent realtor data than the September cutoff for the assessor’s analysis seems to show that the Minneapolis residential market has regained healthy growth. But the downtown commercial trough, here and in other big cities, seems likely to persist for several years.

All this data adds up to a tax shift toward homeowners in 2025. Indeed, their share of the city’s tax capacity has increased by four percentage points since the pandemic’s onset. Some of this may be offset by the state’s increases in the homestead market value exclusion but we won’t know by how much until we get our 2025 tax bills. When the assessor’s office presented details of the shrunken tax base to the Minneapolis Board of Estimate and Taxation in March, Mayor Jacob Frey warned that the outlook foreshadows significant consequences for residential taxpayers. The city’s five-year budget plan calls for a 6.1% increase in property tax collections next year. That benchmark needs intense scrutiny from Frey and the City Council, who govern city spending, and the Board of Estimate, which sets the tax ceiling. It’s also time to consider what can be done to diversify the city’s revenue sources.

Our taxpayers deserve that much.

Steve Brandt is an elected member of the Minneapolis Board of Estimate and Taxation. He is a retired Star Tribune reporter.