In Rochester, downtown rents squeeze out small businesses

Sarah Phelan, right, is renting space within an existing business.
Sarah Phelan, right, found a solution to the high cost of opening a business in or near downtown: her shop, The Root Cellar, sits within Forager Brewery Company.
Jerry Olson for MPR News

Looking out the wide windows of his historic storefront in downtown Rochester, photographer Shawn Fagan says the area is changing for the better.

"We've seen tremendous growth down here," Fagan said. "It's a blast being downtown because there are so many restaurants."

The Destination Medical Center is a big driver of that growth. Since the massive, $6.5 billion economic development project was born in 2013, land developers have been gobbling up property around the Mayo Clinic, and county records show commercial property values across the city have increased by about 50 percent.

Fagan's property has increased in value by more than $80,000 since he bought it, according to county records, and he welcomes that.

But there's a downside: Fagan's property taxes are rising too. In some years, they've gone up by more than $1,000.

Fagan's rising property value and taxes are part of a trend downtown, and with it, landlords are raising commercial rents.

Fagan worries Rochester's suddenly escalating prices will drive out the locally owned small businesses that give the city its hometown feel.

"If prices keep escalating to the point where it's like, 'It'd be better if I'm off somewhere else,' what does that do to our downtown? Do we lose that 'this is for us?'" Fagan said.

Deidre Conroy serves up a plate of homemade scones.
Deidre Conroy serves up a plate of homemade scones from her mobile business at the Rochester Farmer's Market.
Jerry Olson for MPR News

Fostering small business within the Destination Medical Center development district is an explicit goal of the project. But these days many entrepreneurs are priced out, including Deidre Conroy.

Conroy serves up espresso, scones and other baked delectables at Rochester's farmer's market because she can't find permanent location that's affordable. She's tried three times over the course of several months.

She said rent starts at $23-28 per square foot downtown and she's looking at another $125 per square foot in renovation costs to boot.

"You add all of that up, and you're over a quarter of a million already," Conroy said. "And you're still paying out $4,000 a month for a reasonable-sized premises. For a start-up business, that's a lot."

For now, Conroy's mobile food cart, with its crisp white trim and high-end espresso machine, is plan B. But she's not giving up, partly due to interest from her loyal customers at the farmer's market.

"Their first question is 'Where's your bricks-and-mortar? Where can we find you downtown?'" she said. "But they can't...yet."

Conroy has enlisted a real estate agent to help with the search.

Chef David Bredesen serves up bowls of a hot pickle soup.
In a cooking demonstration, Forager Brewing Company chef David Bredesen serves up bowls of a hot pickle soup.
Jerry Olson for MPR News

But local commercial realtor Bucky Beeman says some landlords are waiting for the big fish — lucrative establishments that the Destination Medical Center project promises to bring downtown. He said they just aren't interested in renting to small businesses now.

"It's a matter of finding the right landlords who are a little more open minded to taking a higher risk on some of these smaller businesses," he said.

Beeman said there is a benefit to the high downtown rents: once sleepy residential neighborhoods are suddenly becoming retail destinations.

Signs for The Root Cellar inside Forager Brewing.
Signs for The Root Cellar inside Forager Brewing.
Jerry Olson for MPR News

Historic Kutzky Park and the nearby Cooke Park are two examples, boasting locally owned restaurants, coffee shops and home décor boutiques.

More recently, the Root Cellar joined the neighborhood.

Every month, Root Cellar owner Sarah Phelan preaches pickle-making, do-it-yourself fermenting, preserving or some other foodie skill to a crowd of novices in the backroom of Forager Brewing Company. In the brewery lobby, Phelan operates a store that sells everything from sauerkraut making kits to books on bee pollination.

Phelan said setting up shop inside the brewery was a no-brainer. For starters, it's easier and cheaper than space downtown. The Root Cellar is benefitting from Forager's already widely-known brand.

Phelan said there'd be more foot traffic downtown. But that doesn't matter for her because the people who come to eat and drink at Forager are exactly her target audience.

"These products and the classes we offer are in line with the craft beer and the scratch-made foods," she said.

Meanwhile, county officials say they're starting to see the commercial property boom cool off downtown.