In the midst of dismal times for office buildings in the Twin Cities, Shorenstein Properties surrendered ownership of Capella Tower to its lender, New York-based Metropolitan Life Insurance, last week after a failed attempt at finding a buyer for the second-tallest building in downtown Minneapolis.

While the terms of the transfer aren't public, such transactions are often a deed in lieu of foreclosure, which happens when a borrower relinquishes ownership in an effort to avoid lawsuits and other legal actions associated with a mortgage default or repossession. MetLife also avoided what's known as a short sale, which occurs when the lender agrees to a sale that results in a loss.

In 2018, San Francisco-based Shorenstein paid $255 million for the 58-story tower on 3rd Avenue S. and S. 6th Street, which now has an assessed value of $196.5 million. Shorenstein had recently been working with New York-based Eastdil Secured to find a buyer, and though there were several interested suitors, none were willing to pay as much as Shorenstein wanted. Because Shorenstein didn't openly market the tower, it never made its bottom line public.

"[Shorenstein] had an option to sell it if they wanted to, but they felt like the building and long-term potential was worth more than dumping it right now," said Ryan Watts, executive vice president at CBRE. "MetLife looked at it and said, 'We believe in the building, and we believe in downtown.' "

MetLife said in a statement it could not comment on the specifics of the transaction, but "Capella Tower is a high-quality real estate asset that is well-positioned in the Minneapolis market."

"MetLife Investment Management has a proven track record in institutional real estate and a team with experience in the market," MetLife wrote in the statement.

MetLife offers a wide range of insurance but also provides commercial real estate financing.

The interior of Capella Tower is seen Tuesday in Minneapolis.
Aaron Lavinsky, Star Tribune
The interior of Capella Tower is seen Tuesday in Minneapolis.

Capella is one of at least a dozen of the tallest office buildings downtown with plummeting values as demand for office space remains at historic lows. Earlier this year, Capella University significantly cut its space in the tower giving up 167,000 square feet of space. That leaves Capella with 111,714 square feet in the building. The Star Tribune is a tenant in Capella Tower, which CBRE now manages, though it wasn't involved in the building's attempted sale.

Co-working operator WeWork, which just emerged from bankruptcy, announced in May it would retain a smaller location under a shorter lease term in Capella Tower, where it initially opened its first Twin Cities location of 53,000 square feet in 2017. According to a plan filed with the bankruptcy court, WeWork owes $260,899.54 at Capella Tower, which it will pay at a later date.

Nearly a third of all downtown offices are vacant, though those declines have recently stabilized. Still, office vacancy rates are hovering near record highs, and the total value of downtown's commercial buildings, including offices, has fallen 13% since last year, according to a report from the city assessor's office.

Capella's estimated market value for tax purposes peaked at nearly $268 million in 2020, according to Hennepin County. The 2024 market value for taxes payable next year is about $196 million, up slightly from the previous year but still well below Shorenstein's total investment in the tower, which has recently received several multimillion-dollar upgrades.

Given the rout in office building values, the uncertainty about the long-term prospects for office space and the reluctance of lenders to offer debt, few investors are in a buying mode. And those that are willing are looking for a fire sale, commercial brokers said.

"This is the most challenging market in history. It's very difficult for investors to get financing to buy a building of this magnitude," said Erin Fitzgerald, senior director at JLL. "It's really unfortunate because Shorenstein did such a good job renovating the building and leasing it up. Shorenstein did nothing wrong: It's a function of the market."

Because Shorenstein and other building owners have mortgages that are far higher than the value of the buildings, few of them are marketing and selling their buildings. Instead, many building owners, including Shorenstein, have shopped their buildings to select groups of investors in hopes of discreetly landing a deal that minimizes their losses while avoiding a deeply discounted distress sale that causes a more dramatic reset in value throughout the city.

Generally, that strategy hasn't worked, leaving building owners with few options. Those include renegotiating their debt or, as in the case of Capella, handing the keys back to the lender, which is then left with the challenging task of managing a complex building that's often far from their primary operations.

In December, after months of negotiations and missing a balloon payment on the $151.7 million loan, the owners of IDS Center, the tallest and most valuable office building in downtown Minneapolis, negotiated a three-year extension of its loan. And last summer, downtown scored a win when sixteen floors of upscale office space in RBC Gateway sold for $225 million in what was one of the biggest office sales in the nation.

That, however, followed the sale of LaSalle Plaza, a 30-story office tower, which fetched a fire-sale price of $46 million. Hempel, the local investor that bought that building, is in the process of renovating the space and adding new amenities.

Watts said those sale prices reflected the condition and occupancy of the buildings. RBC was nearly new and fully occupied, while LaSalle Plaza had a higher vacancy rate and needed updates.

"This flight to quality is real," he said.