Some local businesses find Mayo Clinic expansion costly

At CJ's Midtown Lounge, dropping in for happy hour is like taking a trip back in time. It's a place where beers cost two bucks, the juke box plays oldies all day and everybody knows each other by first name.

"That's Steve. And that's Bucky. And that's Orlando," Pam Gran noted cheerfully last week. "And that's Larry. And that's Dave...And that's Big Gus coming in the door.

Gran has been stopping at CJ's, one of Rochester's last downtown watering holes, since 1985. But the bar two blocks from the Mayo Clinic won't be at its longtime location here much longer.

A Rochester developer bought the building a few years ago and plans to demolish it to make way for a mixed-use, high rise development project with a hotel, apartment rentals, and upscale restaurants. The project is part of a booming real estate market in Rochester, particularly in the blocks near the Mayo Clinic's expanding downtown campus.

Mayo Clinic has launched a 20-year, $5 billion plan to remake its flagship campus. The plan includes $327 million in state aid, largely to fund improvements to public facilities in Rochester, which is expected to grow by 32,000 residents over the next 20 years.

•Mayo Clinic expansion fuels new hotel construction in Rochester

While some developers and investors look toward that growth with anticipation, soaring real estate prices have forced other Rochester businesses to consider moving out of downtown or fork over a lot more money to stay in the district.

At CJ's, Gran and other patrons wonder how a move will affect the old-time bar.

"They can re-establish somewhere else, but it's a convenience, you see," she said. "Location is a convenience. And when they move, I'm not sure what will happen. It's not going to be the same. It's going to hurt the businesses."

Employees also are worried the loss of a favorite city spot.

"Once this place goes, there's not going to be anywhere downtown that people can go and drink and come in and just watch sports and play pool for anything a normal, everyday people can afford," bartender Laurie Peterson said.

Owner Gary Kruse and his partner, Bob Sund, are rushing to relocate the business by April 1. His biggest challenge is finding an affordable space replace the bar's 2,200 square feet.

They pay about $2.50 per square foot for the space. Prices in a new building downtown could be as high as $30 a square foot, if they can find one there.

"Right now, there just isn't anything downtown, so we're going to have to move out away from the downtown area," Kruse said. "Eventually, there's going to be commercial rentals available downtown, once they get this stuff done. But that's probably two years down the road."

About 15 percent of existing commercial retail and office properties in downtown Rochester are vacant, estimates Barb Phelps, a commercial sales and leasing agent for Paramark Real Estate Services in Rochester. That's a number in the real estate world that signals a market in need of new commercial space.

"It's not all 'rah, rah, great, look at what's going to happen for Rochester in the future.' All of this stuff is going to have negative effects on some people."

"We need new buildings," she said. "Obviously, your base rent is going to be up there a little bit higher in a new build versus an existing building that's been around for a while."

No organization formally tracks market rates in the city. But Phelps said commercial downtown space goes for $18 to $25 dollars a square foot. She expects that to rise to more than $30 in just a few years, and potentially price out some small and mid-sized downtown businesses.

"It's not cheap," she said of centrally located property. "We are finding a lot of them starting to look on the outskirts of the downtown because they're a little sticker shock when they look at what we have downtown."

Other businesses opt to pay premium prices to stay downtown.

Exhibitor Media, a trade show and corporate event company that has been in its current location for 42 years will have to relocate soon because the building, also home to the Rochester office of Minnesota Public Radio, sold last year to foreign investors.

"It's not all 'rah, rah, great, look at what's going to happen for Rochester in the future,'" company president Randy Acker said. "All of this stuff is going to have negative effects on some people."

Acker said moving to a new building one block away will cost the company more than $400,000. Operating in a newer downtown building will increase his annual expenses by 30 to 40 percent.

"You're talking about an expensive proposition, and it hasn't bettered our business model," he said. "We haven't added capital and equipment. We haven't added employees. We're talking half a dozen employees, just in the out of pocket, that we could have spent growing our business, all we're doing is spending it to move our business."

City Development Administrator Doug Knott said as Mayo's Destination Medical Center initiative takes off, developers will eventually catch up with the demand. As a result, he anticipates the city's downtown footprint will also grow.

But with a tight downtown market and rising rents, Knott expects more businesses to re-assess their location as the city's downtown attracts new development in the future.

"As the core becomes a little more expensive, then the area just beyond the core becomes a little more attractive," Knott said. "So you see kind of an incrementalism where downtown grows outwards."