Developer Carl Kaeding is usually skeptical when marketers advertise new residential construction as “luxury,” but he might just make an exception for the eight penthouses he’s installing on the top floor of Stella, the former Ecolab tower, near Sixth and Wabasha streets in downtown St. Paul.

The historically-sensitive redevelopment of the 1970s-era tower is well underway — workers on a movable platform began replacing windows on the 17-story building’s glassy exterior this past week — and when complete will span 174 market-rate, high-end apartments situated over 2,300 square feet of public-facing retail space on the main floor. That includes the eight “luxury” penthouses, six of which will be two-story, loft-style residences that reach up into what had once been a maintenance level.

Imagine oversized windows with “big sweeping views of the river lines into Minneapolis,” said Kaeding, ticking off a list of next-generation amenities, from hands-free Bluetooth speakers and appliances to electric blinds. A community room on the 16th floor of 386 N. Wabasha St. will offer an outdoor hot tub, outdoor fire pit and sauna with a direct view of the domed Minnesota Capitol and downtown Minneapolis.

“We’re up high enough, we’re above all the other buildings,” said Kaeding, president of Kaeding Development Group in Bloomington. “There’s a lot of buildings that throw around the term luxury that just aren’t luxury. We’ll be the upper end of the market, but the demand exists. We own a portion of the Arlo on Kellogg, the building right across the street from the Xcel Energy Center, and that has a number of penthouse units, as well, that have higher demand. The challenges in downtown St. Paul have been over-exaggerated to a degree.”

Stella’s new windows and energy-efficiency improvements have been key to obtaining a $15.8 million PACE loan in the form of “Property Assessed Clean Energy” financing, on top of $18 million in state and federal historic tax credits. And Stella isn’t the only historic property undergoing an office-to-residential conversion in the area.

On St. Peter Street, Chris Sherman and Sherman Associates are weeks away from unveiling the transformation of Landmark Tower, a former office tower, into 187 units of residential housing, and Rich Pakonen of PAK Properties is seeking financing to do the same to the historic Hamm Building. Pakonen, in an email, said he envisions keeping the first floor and lower levels of the Hamm Building unchanged, including the retail, restaurant and theater spaces, while adding 129 residential units on the upper floors.

If all three projects open in the next year or two, the corners of downtown closest to Rice Park will soon welcome a surge of new residents, while taking some 800,000 square feet of underutilized office space off the downtown market.

“That’s a total of almost 600 units — 1,200 people — within a two-block area,” Kaeding said.

Public financing, historic tax credits

To complete office-to-residential conversions in decades-old properties, each project is counting on no small amount of public funding or specialty financing.

To install 187 market-rate residential units within the 1980s-era Landmark Towers office building, Sherman Associates is relying on $12 million from a $21 million tax increment financing district approved by the previous St. Paul City Council in 2023. The TIF district effectively loans money to the project that would otherwise go toward property taxes. The $97 million conversion is also boosted by state and federal historic tax credits.

The first residents to move into the updated Landmark Towers project will arrive in April, said Sherman, in an interview.

“Without historic tax credits, none of this investment would have occurred,” said Sherman, noting he and at least two other developers are looking at additional opportunities for office-to-residential conversions downtown. “The transformation of downtown St. Paul to a neighborhood has been underway for a while, but it’s got tremendous potential in the next few years to accelerate. Some buildings that were largely unoccupied have now been made available for conversion. … The upward pressure it can provide on reducing office vacancy and creating vibrancy downtown is huge.”

Kaeding, who hopes to open Stella in early 2026, said his building conversion had been started by a previous developer based in Chicago, but the project stalled and went into court-ordered receivership. He’s happy it’s moving again.

“It’s great to turn the lights on in what had been a dark building,” he said.

Rafi Golberstein, chief executive officer of Pace Loan Group in Minneapolis, said the 30-year, fixed-rate PACE loan for Stella was finalized in December. PACE loans, which vary from state to state and are issued by private lenders, are intended to prop up projects that have elements of energy efficiency or renewable energy, and in this case will support improvements to the building’s envelope, windows, HVAC, plumbing, lighting systems, mechanical and domestic hot water pumps. The renewable and energy conservation measures are expected to save some $1.19 million annually.

Converting to residential

Golberstein noted fancier office buildings in downtown Minneapolis may draw more eyeballs, but they’re also too big to smoothly convert to residential uses because large floor plates would leave standard-sized interior units well removed from natural light.

“This asset, we’ve been looking at for a long time, for years,” Golberstein said of Stella. “The reality is it’s really hard to do, and 386 Wabasha just happens to have the right core layout. This is a fairly rectangular shape, there’s one central elevator corridor, and you don’t have deep bays on either side of the corridor.”

“It’s pretty easy to imagine how an apartment fits into those bays — the window to the elevator shaft,” he added, noting Stella’s floor plates span about 10,000 square feet. “The Dayton’s building in downtown Minneapolis, which is not doing great, the floor plans are like 50,000 square feet. How do you realistically fit an apartment into that?”

Other challenges abound, and they can be pricey.

“With a ground-up development, you are literally building it yourself,” Golberstein said. “You know where everything is. With these conversions, you’re literally tearing down walls not knowing what you’re going to find, and there’s always a boogie man out there. It could be asbestos, it could be mold, it could be ‘Oh, there’s no water pipes on this floor.’ The reality is they’re actually more expensive to do than a ground-up development.”

The Inland Real Estate Group of Illinois, a partner on Stella, acquired the former Ecolab tower out of foreclosure in December 2022 for $17.9 million, a process that Golberstein called key to lowering its selling price to a point where an office-to-residential conversion was financially feasible. The structure was more recently appraised at $24 million.

“There has to be something that resets the price points to make them pencil out,” Golberstein said. “You may have bought the building when it was 100% occupied. … For me to buy the building and convert it, I have to buy it for a way lower price.”

Madison Equities

Some foresee additional price corrections before other downtown St. Paul buildings find responsible buyers.

Last April, 10 commercial properties owned by Madison Equities hit the market together en masse following the death of company principal Jim Crockarell. Despite the offer of a group sale, certain holdings — like the Park Square Court building across from Mears Park — held under their own limited liability corporation have faced bankruptcy proceedings or other litigation.

The Lowry Apartments, which were not part of Madison’s mass offer, was bought by a lender for $7 million through a foreclosure proceeding last September, below the Ramsey County estimated market value of $8.6 million in 2024 and $9.5 million in 2023.

“The whole Crockarell portfolio is going to be fascinating to see how it turns out,” Golberstein said.

Office-to-residential conversions could be a saving grace for those and other distressed downtown office buildings, but developers say they’ll need more financial assistance. The “Conversion Underutilized Buildings” credit — a state legislative proposal to provide a 30% tax credit to convert underutilized office buildings into residential properties — did not get approved last year, but city officials are hopeful this will be the year. Sherman and Pakonen said that would be an important boon to downtown projects like the Hamm Building.

“That’s absolutely one of our top priorities, to get that credit through,” said incoming St. Paul City Council President Rebecca Noecker, who represents downtown St. Paul.

“Everything I’m hearing is there’s a lot of interest in the market … (and owners) of these properties are becoming more realistic about the values they can expect from them, and that’s opening the market to more players,” said Noecker, the outgoing chair of the city’s Housing and Redevelopment Authority. “I don’t think we can continue doing things the same old way. The world has changed since COVID. Maybe it’s different models of living — like letting people share kitchen spaces for co-living.”

The same outside-the-box thinking could boost large commercial properties, she said. Next door to Stella, another former Ecolab tower has drawn office tenants, but not by offering spaces in the style of a 1950s law firm or nest upon nest of cubicles. “The commercial spaces, I don’t think we’re in the age of having tens of thousands of square feet dedicated to one user,” Noecker said. “We’ve seen Osborn370 be successful by subdividing into multiple co-working spaces.”

Elsewhere downtown, the city worked with the Metropolitan Council, a fellow property owner, to issue a request for proposals for a vacant lot surrounding the downtown Central Station light-rail stop on Cedar Street. Noecker expects tentative developer status will be awarded to a developer in mid-February. The city has been in discussions with Flaherty & Collins Properties of Indianapolis.