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Property taxes are likely to rise in Minneapolis and St. Paul after mayors of both cities proposed property tax increases of about 8% in their budget proposals.

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

St. Paul Mayor Melvin Carter unveiled a budget plan that calls for a 7.9% property tax increase in his speech on Tuesday, while Minneapolis Mayor Jacob Frey proposed an 8.1% property tax increase in his speech on Wednesday.

Andrew Babula, director of the real estate program at the University of St. Thomas, said office buildings in urban cores face dual pressures when it comes to property taxes: downward pressure on market value due to rising vacancy rates and upward pressure from the level of taxes.

“It just depends on what has the bigger impact,” Babula said. “I think it’s going to vary from building to building because certain office properties, particularly those that haven’t been able to maintain their occupancy as well – usually those are older buildings that aren’t as well positioned and don’t have amenities.”

Even though a building might see an 8 to 10 percent increase in property taxes and a 25 to 40 percent decrease in market value, overall property taxes will likely still decline, Babula said.

In a statement to Finance & Commerce, BOMA Minneapolis President Sarah Anderson said a property tax increase in Minneapolis as well as historic difficulties in the commercial real estate sector, such as “extremely high interest rates,” are cause for concern because they will impact “our ability to recover and survive.”

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

Cecil Smith, president of the Minnesota Multi Housing Association, said in an interview Wednesday that there is “real nervousness” among landlords in both cities, but also throughout Greater Minnesota, about the property tax increase.

“Housing providers have seen really significant impacts from inflation on their operations, insurance, wages and property taxes,” Smith said, adding that the market has led to sluggish rental growth. “The property tax increases coming next year are going to be very difficult to manage.”

How property taxes fare across the metropolitan area will likely depend on the size of the city, Babula said. Minneapolis and St. Paul are particularly at risk because their downtown areas have so much office space.

“The suburbs will still feel the impact and their budgets are smaller, but percentage-wise they could see similar impacts,” Babula said.

This move by Carter and Frey is not unexpected. In May, Frey said in his State of the City address that the decline in value of downtown office buildings had led to a budget deficit, and he warned that this was not the year to “introduce shiny new programs” but to leverage existing ones.

Frey said in his speech on Wednesday that maintaining the current programs would initially require an estimated double-digit increase, which he said was “unacceptable to anyone.”

For St. Paul specifically, Babula said the likely reason such a levy increase is needed is that it is likely to offset inflation, which has driven up the cost of city services, and also to account for the city’s increased spending on housing programs and downtown revitalization efforts.

In his speech, Carter advocated spending under the All-In Housing investment framework, such as extending the down payment and supporting studies into converting office buildings into multi-family housing.

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