AECOM: Rochester office market still hinges on Mayo.

Byline: William Morris

Rochester, Minnesota, is well on its way to becoming a hub location for the health care industry, but a new report suggests it's not yet ready to support a growing office market.

Rochester is now five years into the Destination Medical Center initiative, a 20-year buildout centered on the downtown headquarters of Mayo Clinic. A market study by San Diego-based AECOM found that, excluding Mayo, the Destination Medical Center district has seen only marginal office expansion since a previous study in 2014.

While projects under construction will add more than 100,000 square feet of office space in the next few years, the market still depends heavily on Mayo Clinic to find and attract new office users, AECOM Principal and Vice President Bill Anderson said Tuesday.

"You're a small market compared to other markets, creating a new industry cluster [by] leveraging Mayo Clinic," Anderson told the Destination Medical Center Corp. board, which commissioned the study. "Many markets would love to have that starting point but you don't have that critical mass of a sector to just rely on organic growth that sector is generating."

AECOM split the office market into medical and technology space and everything else, and found the 85,000 square feet of med/tech office space under construction will likely meet demand through 2024. That space, in the One Discovery Square phase I building under construction by Golden Valley-based Mortenson, is already more than half leased by Mayo Clinic, the University of Minnesota Rochester and software company Epic, with more tenants on the way.

For general professional office space, AECOM identified 20,000 square feet in the pipeline but said demand through 2040 will likely be between 37,000 and 76,000 new square feet of space. Addressing that will most likely mean renovation and expansion of existing properties more than new construction, Anderson said.

"The rents have been growing to match the region. But those rents may not be sufficient to warrant construction of a standalone office building," he said.

Rochester needs new law firms and marketing offices, as well as health care companies, said board chair R.T. Rybak, if only to make the region more attractive to the health care workforce it is trying to attract.

"In downtown Minneapolis, Target's headquarters [attracts] all these other types of businesses that need to be near them," said Rybak, the former Minneapolis mayor, at Tuesday's meeting. "It...