As the number of COVID-19 cases continued to spike across Santa Clara County this week, Palo Alto's city leaders found themselves staring at two distinct but related assignments: manage a raging health crisis and try to save the local economy from falling into a rapid downward spiral.

The county's shelter-in-place orders, which have been in effect since mid-March, may have prevented a deeper public health crisis in the region, but they have also taken a heavy toll on the business sector. Scores of restaurants and retailers have shut down. Some eateries pivoted to outdoor dining, only to find the activity suddenly prohibited under the county's most recent stay-at-home directive. Other businesses, including gyms, hotels and entertainment venues, face an even more uncertain future as residents curtail their travel plans and the work-from-home model continues to stick.

So far, the effects of the economic recession on the Peninsula have been significant but geographically uneven. In some areas, sales tax revenues have remained relatively flat; in others, they have plunged steeply. Palo Alto and Mountain View both fall in the latter category, according to a report from Thomas Adams, whose firm Avenu Insights and Analytics serves as Palo Alto's sales tax consultant. In the third quarter of 2020, sales tax revenues in Palo Alto dropped by 23.2% from the same period in 2019. In Mountain View, the decline was 24.2%. By contrast, sales tax revenues in Redwood City and San Mateo shrank by only 0.1%, while in Walnut Creek they went up by 1.3%, according to Adams.

"While you can look at statewide numbers, each jurisdiction is its own entity and has its own trends," Adams said during a Nov. 30 panel discussion on the impending economic recovery.

In Palo Alto, the trends are looking particularly grim. City staff are currently projecting a $34.6 million drop in tax revenues, with sales-tax receipts decreasing by $13.8 million from last year's $34.3 million and hotel-tax revenues plunging by $14.4 million, from $29.3 million to $14.9 million, as hotels still report vacancies of about 80%.

With Stanford University offering remote classes, business travel virtually nonexistent and most major employers switching to telecommuting, the local demand for hotel rooms, restaurant meals and high-end apparel has shrunk. In fact, the city's daytime population is now roughly half of what it was pre-COVID, City Manager Ed Shikada told the council in a Nov. 30 presentation on the city's economic recovery strategies. Prior to the pandemic, the city saw about 130,000 people on the weekdays; now it's down to about 70,000.

"What was previously almost a doubling of our population during the day is no longer working here in Palo Alto on a day-to-day basis," Shikada said. "As such, the population and quite frankly the market that businesses here in town are serving has changed dramatically in our shelter-in-place environment."

While population loss is one factor in the economic recession, Palo Alto's retail mix is another. The city draws nearly 59% of its revenues from its 25 largest tax producers, according to Adams. The list includes numerous department stores (Macy's, Nordstrom and Neiman Marcus) as well as purveyors of luxury goods (Louis Vuitton, Hermes and Richemont), sectors that have seen significant losses during the sweatpants-friendly era of the pandemic. Palo Alto is also a restaurant-heavy town, which makes it particularly vulnerable to health orders that ban dining in.

Because of the vagaries of state law, the decline of retail in Palo Alto also means that the city is receiving less revenue from online sales. Under the existing "county pool" system, taxes from online sales get pooled from all jurisdictions in the county and then distributed to individual cities. The share each city gets depends on how well its brick-and-mortar retail is doing, Adams said. Palo Alto, which has historically received between 6% and 7% of the county pool, allocations saw its share dwindle to 5% in the last two quarters, according to Adams.

In some ways, things have gotten slightly less dismal in recent months. The city saw cash receipts drop by 38% in the second quarter of this year, when compared to the same period of 2019. In the third quarter, the loss from the prior year was less: 24%, according to Adams' report.

However, the most recent health orders, which further restrict business activity, are expected to further cut into local revenue.

"Efforts to contain COVID-19 are paramount to public health and will have corresponding impacts on revenue streams like sales tax as certain economic activities remain limited and constrained by regulations," a report from Avenu states.

A sudden recession

The current recession is distinct from prior ones in several ways, Adams said. Normally, recessions take between six to nine months to materialize; this one happened virtually overnight. And while most recessions have a big impact on major expenditures — including auto sales and construction projects — this one is hitting sectors that typically aren't affected as much: namely, restaurants and retail.

"This pandemic recession is an artificially created recession due to constraints on regulation and consumer behavior relating to perception of safety and that sort of thing," Adams said.

Adams said he expects the city's economic recovery to take about four years, though the exact length will be determined by factors such as a potential fiscal stimulus, the success of the vaccines and the policies of President-elect Joe Biden's administration.

Jerry Nickelsburg, an economist and faculty director at the UCLA Anderson Forecast, suggested that while high-tech sectors with high-income jobs may recover sooner, the leisure and hospitality industry may not get back to its pre-COVID levels until 2024 or later. Sectors with halting recoveries will likely include tourism, restaurant, bars, live events, accommodations and retail, Nickelsburg told the council during the Nov. 30 discussion.

"We're expecting California to outperform the U.S. because of its technology industry. It will be generating high-income jobs, all in construction and in advanced manufacturing. But it's going to lag in low-income jobs of leisure, hospitality and retail. So the issue of inequality is only going to get worse in California, absent policy intervention."

Nickelsburg also rejected the notion that stay-at-home orders stand in the way of economic recovery. He cited a June 2020 paper by Sergio Correia, Stephan Luck and Emil Verner, which evaluated how different cities responded to the 1918 pandemic. The researchers found that "non-pharmaceutical interventions" (NPI) such as shelter-in-place orders were associated with better economic outcomes after the pandemic, not worse.

"If anything, cities with stricter NPIs during the pandemic perform better in the year after the pandemic," the three researchers wrote in their paper, "Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu."

"There's a lot of discussion about, 'Are we trading off the economy for health outcomes?'" Nickelsubrg said. "All of the evidence from 1918-1919 suggests that that's not a tradeoff. That if you get better health outcomes, you also get better economic outcomes."

Nicholas Bloom, a professor at Stanford University who conducts monthly surveys with 2,500 employees across the nation, suggested that some of the existing work trends will outlive the pandemic. His surveys show that the majority of employees — and employers — in industries that currently accommodate remote work favor a post-pandemic model that entails three days of coming to the office and two days of working from home.

"When you ask firms what they plan, there is a very strong consensus that post-pandemic these folks are going to come back to work in the office something like three days a week," Bloom told the council.

The lingering telecommuting trend need not necessarily spell doom for Palo Alto's economy. According to Bloom, the city will continue to see demand for office space, particularly in smaller, low-rise office buildings where workers do not need to crowd into elevators or sit in tight cubicles. He also noted that some of telecommuters live in Palo Alto and, as such, could support local businesses by eating out.

But while restaurants and retailers may see some signs of recovery next year, sectors such as gyms, entertainment venues, leisure and travel, may see permanent reductions, Bloom said.

"For planning, things like allowing gyms, cinemas and things like that to be repurposed to be office space or something else may be something that is going to be important," Bloom said. "Some of these things are seeing permanent demand shifts."

What's a city to do?

Like other cities in the Bay Area and across the nation, Palo Alto is striving to respond to — and shape — the new normal. Last week, Shikada unveiled the city's Economic Recovery Strategy, a broad framework that combines short-term measures for managing the pandemic (virus testing, contact tracing and vaccine distribution) and long-term projects to help sustain — and in some cases, transform — the business sector.

The recovery effort could significantly alter the city's zoning code, its business climate and the look and feel of its primary commercial districts, which have already seen a remarkable transformation since the shelter-in-place orders first took effect in March. This week, in response to the county's latest health order, the council suspended the most popular program of the pandemic era: the closures of University and California avenues to cars. While the council had intended to keep the streets car-free at least until Memorial Day, Shikada moved to temporarily reopen them because the latest public health order bans all forms of onsite restaurant dining, including eating outdoors, at least until early January.

The City Council expects the recovery effort to dominate its agenda for the next year, and likely longer. Most members have proposed including it as an official priority for 2021. Shikada, for his part, has been holding regular meetings with downtown business owners as part of the city's ongoing initiative, Uplift Local.

"We did have a discussion this afternoon with a few downtown businesses, based on the really devastating situation that they're now confronting in additional restrictions relating to the pandemic," Shikada told the council on Dec. 7. "One comment that resonated was that this is the time for us to start thinking long-term and to be able to — while working through today's emergency — start to really focus our attention on what the long-term strategy is for continued vacancy both downtown, Cal. Ave. and citywide."

In some areas, the recovery effort may spur the city to achieve things that council members have intermittently discussed for decades but that invariably failed to advance beyond the wishful-musings stage (the closure of University Avenue falls into this category). Council members and city staff agreed this week, for example, that the time is ripe to take another look at Fiber to the Home, an effort to bring high-speed internet access to every household through the municipal dark-fiber-optic network. After three decades of exploring — and ultimately discarding — the idea, there is general consensus now that this may be the right time to finally turn this vision into reality. Vice Mayor Tom DuBois and council members Greg Tanaka and Lydia Kou all spoke in favor of advancing the Fiber to the Home program during recent meetings on the economic recovery. Shikada also listed expanding community outreach on Fiber to the Home as one of the city's "priority initiatives."

"We really need high-speed, reliable, affordable internet, I think, for everyone," Tanaka said. "Especially if work-from-home is going to be more standard, which I think it is. I think it's going to be around here longer."

Cracking the code

In considering the troubling retail trends, Palo Alto's elected leaders have largely acknowledged that "business as usual" is no longer a viable option. As such, the council's recovery plan will almost certainly include changes to the zoning code, some of which are already in the works.

On Dec. 14, its final meeting of the year, the council is expected to make it easier for commercial recreation businesses such as gyms and yoga studios to set up shop downtown by removing the existing requirement for conditional-use permits and by relaxing parking standards. The new rule would apply only to businesses with up to 5,000 square feet of gross floor area (effectively treating them like boutique "personal service" studios), and it would exclude parcels that front on University Avenue.

The proposed ordinance would also remove existing conditional-use permit requirements for barbershops and salons in the California Avenue business district. In addition, medical offices with less than 5,000 square feet in floor area would no longer require a conditional-use permit to open in commercially zoned districts (currently, the threshold is 2,500 square feet).

While these changes are relatively minor, the council had recently signaled its intent to consider more significant — and contentious — zoning revisions in the near future. The most controversial of these is a proposal to allow banks, law firms, architecture firms and other types of office banks to fill downtown spaces currently reserved for retail and restaurants. The city's Planning and Transportation Commission will be considering the proposal in the coming months. The commission will also weigh a proposal to scrap the citywide requirement to reserve ground-floor spaces in commercial zones for retailers. While four council members support removing the requirement in most areas of the city (while keeping it along University and California avenues), the proposal is unlikely to advance under next year's council: Newly elected council members Pat Burt and Greer Stone have been far less enthusiastic about removing retail protections than outgoing members Adrian Fine and Liz Kniss.

Meanwhile, council member Tanaka suggested at a recent meeting that the city consider removing its longstanding prohibition on big-box retail stores. He noted during a November hearing that businesses such as Costco, Walmart and Home Depot have actually thrived during the pandemic, while small, speciality stores that Palo Alto has generally supported continue to get hammered during the recession.

Other council members did not support this plan, but they generally agreed that it would be appropriate to take a fresh look at the city's retail laws and adjust them to accommodate the new reality.

"We really are at an inflection point and our businesses will be transitioning and transforming," council member Alison Cormack said on Nov. 30. "And while we're supporting our existing businesses, I want us to think long and hard about what it will look like in the future."

Meeting business and community needs

While the zoning changes could take months — or years — to make a difference, other proposed measures would have a more immediate impact. These include further changes to California and University, which had been closed to traffic since June and July, respectively.

One idea that was proposed by John Shenk, CEO of the real-estate firm Thoits Brothers, calls for installing bollards on University Avenue. The city would be able to raise them when needed to close the avenue to traffic and lower them to keep University car-free. At the Dec. 7 meeting, both Tanaka and Shikada spoke in support of the idea,

"We really see a great opportunity there," Shikada said. "There's clearly multiple needs along University. As such, a concept like that could be really helpful for us to be able to adapt to a variety of needs in different times of day and week."

City officials are also considering other ways to boost community morale — and business activity — despite pandemic-era restrictions. Kou recommended launching a business program in which customers can obtain gift certificates that can be used at various local businesses.

DuBois noted that other cities are holding car-based events (Redwood City, for example, holds regular drive-in movie nights at its port as part of its "Motor Movies" series) and recommended that Palo Alto find new and creative ways to host community gatherings in a safe manner. He also suggested that the city restore its recently abandoned grant program to neighborhoods, which were used in the past to fund neighborhood activities.

Kou also supported holding drive-in events, potentially at the Palo Alto Airport. She and Cormack also recommended that the council re-engage with neighborhood associations and other community leaders to discuss the future of retail. In addition, Kou has supported hiring an economic development manager, a position Palo Alto once had, to guide the city's recovery effort and help bring in a viable mix of new retailers.

"I just want to make sure that as we're coming out of it, we don't go back to 'as is' — to what we had pre-COVID," Kou said during the Nov. 30 discussion. "I'd like to see it become more robust and have more diversity in the businesses that we have in town and not just have plenty of just a few things."

Find comprehensive coverage on the Midpeninsula's response to the new coronavirus by Palo Alto Online, the Mountain View Voice and the Almanac here.