After taking a heavy hit in the first two years of the pandemic, Palo Alto's main retail strips appear to be enjoying a quiet rebound.

With fewer employees commuting to town and indoor dining on hiatus in the early days of the pandemic, many businesses on California and University avenues saw revenues plummet in 2020 and 2021. Several popular establishments, including Antonio's Nut House and The Old Pro, closed up for good.

Even though hybrid and remote working remain the norm, customers are flocking back, according to a report from the city's new economic consultants.

California Avenue, which transformed into a pedestrian-only zone during the pandemic, saw its revenues dip from $893,081 in 2020 to $747,103 in 2021, according to consultant Barry Foster, principal and managing director at HdL Companies. But in fiscal year 2022, it brought in $1 million, a 16.9% increase over pre-pandemic levels.

Downtown also is bouncing back. After tax revenues fell from $3 million in 2020 to $2 million in 2021, University Avenue and surrounding blocks brought in $3.14 million in 2022, a 5.4% increase over the two-year period.

But whereas downtown and California Avenue are surviving, Stanford Shopping Center and El Camino Real are downright thriving, with sales tax revenues in these two areas rising by 35.5% and 31.9%, respectively, between 2020 and 2022. Thanks in part to their success, Palo Alto reported $27 million in sales tax receipts in the fiscal year 2022, which ended on June 30. That's up from $22.5 million in 2021 and $24.2 million in 2020.

The city's economic recovery, however, remains tenuous. As the City Council repeatedly acknowledged Monday during a wide-ranging discussion of economic development, retail needs significant help to remain vibrant and regionally competitive. Council members also signaled that they are preparing to take actions that will change the look and function of downtown and California Avenue. This includes tweaking the zoning code to modify allowed retail uses (this could have the effect of limiting businesses like nail salons and barber shops on California Avenue), modifying the parklet program to create a cohesive streetscape design and upgrading aged infrastructure.

The exact nature of these changes will be determined over the next year, as the city's team of consultants, led by Streetsense, conducts a full study of the local market and issues recommendations. The effort kicked off Monday, when consultants provided an overview of the challenges and opportunities that Palo Alto will have to consider as it tries to reinvigorate retail.

The Streetscape report offered some signs of hope. In addition to the retail rebound, Palo Alto is also seeing a resurgence in hotels. After taking a colossal hit during the pandemic, when many hotels saw their occupancy rates plummet into single digits, the local hotel industry is now enjoying rates between 70% and 80%, close to pre-pandemic levels, according to Larisa Ortiz, managing director at Streetsense. With the city adding two Marriott hotels during the pandemic, tax revenues from hotels are now higher than they were before COVID-19 hit, Ortiz said.

Yet Palo Alto is facing the same kind of challenges that retailers across the nation are wrestling with: the growing prominence of online shopping and delivery services. Here, like elsewhere, this has made it hard for brick-and-mortar shops to remain viable.

"We've seen an accelerated transformation of people going toward spending on items that they can't buy online — spending on experiences, spending on food and beverage, entertainment and activities that have taken center stage in many of the environments in which we work, where retail is supportive of the food and beverage industry," Ortiz said. "And we've seen the need for highly managing and curating activation of public space as well, focused on experiences."

While the Streetsense report is expected to help the council with the curation, several council members offered preliminary ideas for staff to consider. Council member Greer Stone suggested having the city work with the business community to make an online map promoting local businesses. Stone also suggested that the city needs to pay more attention to keeping shopping areas clean.

"I hear frequently from residents, frustrations over trash and other issues in downtown and California Avenue. Frequently getting emails from residents in Midtown that there are overgrown planters and trash there," Stone said.

Stone said he found the report encouraging.

"I think it's clear. Retail is not dead, we just need to reinvent ourselves a bit to make sure we continue to strengthen it and attract shoppers here," Stone said.

That reinvention is already in progress. With California Avenue and a portion of Ramona Street in downtown closed to traffic to facilitate outdoor dining, the council has been continuously revising rules for the new dining areas and enhancing design standards.

One contentious change was made last month, when council members approved a new policy that requires restaurant owners whose parklets extend beyond neighboring storefronts to get letters of support from neighbors. The policy, which will kick in next year, is a response to numerous situations in which retailers complained about dining areas obstructing their businesses. Sand Hill Properties, which recently bought the University Avenue building that houses Restoration Hardware, came out against the parklet installed by Local Union 271, a neighboring restaurant. And Coupa Café, which has a parklet on Ramona Street, will be required to significantly reduce its outdoor dining space because of a dispute with a neighbor, developer Elizabeth Wong.

But despite these squabbles, Palo Alto council members see parklets as the best antidote to stagnation. Mayor Pat Burt said Monday that outdoor dining is "the thing that is bringing vitality to our various areas that have it."

"Without that, those downtowns — Cal. Ave. and University — would be dead and they'd be going downhill further. They are the things that are bringing people there," Burt said. "Now we need to convert that into how it really helps the retailers and others thrive as a result of that."

Burt also argued that the city should act quickly to spruce up downtown rather than wait for a long-term master plan to be completed.

"If we wait for a master plan, we can see our downtowns go downhill further or not recover. But if we soon invest in moderately low-cost initiatives, that I think will begin a process of an upward trend in those areas."

Most council members acknowledged the need to readjust expectations to account for the dwindling number of commuters coming into town. Council member Alison Cormack called the change in employees "the biggest challenge we have."

"It's just messing with the ecosystem that we've been relying on and we really will have to make some changes," Cormack said.

One possible strategy to address this trend is encouraging more neighborhood-serving businesses. While the consultants' report focused largely on fancy shopping areas such as downtown and Stanford Shopping Center, which draw visitors from across the region, council members Eric Filseth, Tom DuBois and Stone all said they'd like to see the city pay more attention to smaller neighborhood hubs like Midtown Shopping Center and Charleston Plaza, which have not seen their revenues recover to pre-pandemic levels.

DuBois also suggested that the city should focus some of its retail energies to south Palo Alto. He alluded to the city's new Housing Element, which calls for more than 2,000 new dwellings on and around San Antonio Road by 2031.

"We have a lot of housing planned down there and if those kinds of neighborhood shopping centers are challenged right now, it would be really good to make sure that we do what we can to keep them going and reinvigorate them if we can," DuBois said.

While council members were pretty optimistic about the retail recovery, council member Greg Tanaka argued that the city needs to be much more flexible in assisting local businesses. This means rethinking some of the local retail policies such as its ban on chain stores, which keeps viable retailers from coming to the city. Palo Alto, he argued, needs to be "much more competitive."

"We're not going to necessarily have tenants flocking to us as maybe we did before," Tanaka said. "We have to keep that in mind. Without that, if we're super picky, make it really hard, people just aren't going to be here."