St. Paul's office market, already the weakest in the Twin Cities, suffered another serious setback Thursday when U.S. Bancorp announced it would move 1,600 employees early next year to Richfield.

The move, which will nearly empty a 325,000-square-foot building on Shepard Road along the Mississippi River, represents more than one-third of the bank's workforce in St. Paul.

The Minneapolis-based bank has leased about 340,000 square feet at Meridian Crossings, an office complex near the intersection of Interstates 494 and 35W.

U.S. Bancorp spokesman Steve Dale said the flexibility to expand at the Richfield location played a part in the decision to move. The facilities will house a variety of operations, including technology, product management, human resources and credit and risk management, he said. He declined to say whether the bank would be hiring, but said the new office will give it the ability to grow.

The news was a coup for Richfield, where officials said they knew their city was in the running for the bank's relocation but didn't know for sure it was coming until it was announced.

"I'm absolutely elated," Richfield City Manager Steve Devich said. "With all the glum economic news, having 1,600 new jobs located in Richfield is a huge boost for us." He said the bank will be the city's second-largest employer, behind Best Buy Co. Inc., whose corporate campus is across 35W from Meridian Crossings.

It's a much different story for St. Paul and JLT Group Inc., the owner of the Shepard Road building that U.S. Bancorp has occupied for about 12 years.

U.S. Bancorp is St. Paul's largest private employer, and the third-largest behind the state of Minnesota and St. Paul Public Schools, according to the most recent research from the Capital City Partnership.

Cecile Bedor, St. Paul's director of planning and economic development, said the bank would still be a top-five employer after the move. In addition to Shepard Road, the bank also has facilities at U.S. Bank Center at 101 E. 5th St., on St. Paul's West Side and at Energy Park in the Midway area.

But Bedor conceded that the city was disappointed by news of the bank's move. "We worked with U.S. Bank to find some space that would meet their needs, but we didn't have any that was unoccupied," she said. This wasn't about moving out of St. Paul, she said, it was about the Shepard Road building no longer fitting the bank's business needs.

St. Paul's office market is one of the smallest in the Twin Cities, with few large newer buildings to accommodate an employer like U.S. Bancorp. Even so, the city has long had the highest overall office vacancy rate in the Twin Cities. Almost 25 percent of its downtown office space was vacant at the end of 2009, according to research from Bloomington-based NorthMarq. The average vacancy rate for its older buildings, such as the Shepard Road property, was even higher, at about 35 percent.

"It's going to be very difficult [to fill the vacancy at Shepard Road], said John Mannillo, a commercial broker who is active in the St. Paul. "There just aren't the users out there."

St. Paul has attracted some smaller employers in the last year. The city offered supercomputer firm Cray Inc. a $400,000 forgivable loan to move 220 employees from Mendota Heights to 51,000 square feet of space in Lowertown. Microsoft moved about 35 employees into a downtown St. Paul building.

But St. Paul lost out on having Opus Northwest build a mixed-use project on the riverfront when no large office tenant could be found to anchor the development. There's also uncertainty surrounding the continued presence of another major employer, Ecolab Inc., which is exploring several options for its future space needs. An Ecolab spokesman said Thursday the company is looking at options both downtown and in the suburbs.

A large chunk of the space the bank will occupy at Meridian Crossings was being subleased by Residential Capital, according to Whitney Peyton, senior managing director at CB Richard Ellis, the firm that marketed the property. The financially battered mortgage-finance arm of GMAC Financial Services has slashed its Twin Cities workforce in recent years.

Jerry Trooien, whose JLT Group has owned the Shepard Road building for about 12 years, said he has no immediate prospects for filling the space.

"We're back in the market along with everyone else," he said. Trooien said the building, one of the largest in his real estate portfolio, could be divided for use by several tenants.

The loss of U.S. Bancorp as a tenant is the latest of several business problems to beset Trooien. Last year he was behind on taxes on several properties, although he said he currently is paid-up on taxes on the Shepard Road building. Some, including the St. Paul building that houses JLT's headquarters, have vacancy rates far above what's currently the average in the depressed office and industrial markets.

Meanwhile, his aircraft leasing firms have lost legal battles with lenders. Trooien recently was ordered to give back the planes and pay millions of dollars he owed under the aircraft loan agreements.

Staff writer Mary Jane Smetanka contributed to this report. sfeyder@startribune.com • 612-673-1723 chavens@startribune.com • 612-673-4148