• A city meeting will be held over Zoom on Thursday, June 29, to discuss the economic development strategy. See details at the end of this article.

Palo Alto should relax its ban on chain stores, allow taller and denser commercial buildings and create an "incubation" program that allows enterprising vendors to occupy vacant shops on a short-term basis, city consultants are recommending in a new report that will help guide Palo Alto's economic development strategy.

Drafted by the firms Streetsense and HdL Companies, the new strategic document proposes nearly 30 initiatives, large and small, for transforming and energizing commercial districts that have yet to recover from the pandemic.

These include painting more murals to encourage visitors; reviving the currently dormant Downtown Business Improvement District to raise money for street cleaning and other downtown needs; enhancing University and California avenue streetscapes; and making parking easier by installing digital signage at garages and creating an app-based parking management system.

The document, which the City Council will discuss after it returns from its summer break, is the city's blueprint for addressing one of its top official priorities: economic recovery. The council already took some steps toward pursuing that goal last year, when it hired an economic development manager. Last week, the council adopted a budget that adds another position to help implement the new plan.

Steve Gugliardo, the city's economic development manager, called the new economic strategy a "roadmap" for future investment in the local economy.

"One of the big parts is organizing our work on economic development and investment and really making sure that they're sequenced appropriately, that we're using them in concern appropriately and that they all become greater than the sum of their parts individually," Gugliardo told the council during a March 13 public hearing on economic development.

Though the city's economy has been gradually improving, with growing tax revenues fueling a healthy budget that restores many of the city services that had been cut during the pandemic, the growth has been uneven, according to the strategic document.

Some areas, most notably Stanford Shopping Center, are now thriving and generating more sales than they did before the pandemic. Meanwhile, downtown and California Avenue remain plagued by vacancies and underwhelming revenue figures, according to the consultant's analysis.

Though both of these areas have shown signs of resurgence over the past year, total sales tax revenues continue to lag behind the pre-pandemic levels as they struggle to overcome recent shifts by consumers and employees to online shopping and remote work, respectively.

According to the analysis, downtown has been the slowest to recover, with total sales tax revenues in 2022 remaining 25% below 2017 levels. On California Avenue, which was transformed into a car-free zone during the pandemic, sales tax figures in 2022 remained 9% below the 2017 levels, the report states.

Some of the recommendations in the new strategic plan are already moving ahead, including its call for more public art, outdoor dining, biking amenities and streetscape improvements in its downtown areas. Palo Alto is separately exploring further changes to both California Avenue and University Avenue, and the council just approved a consulting contract for updating the city's bicycling master plan.

The question of chain stores

Other ideas are more ambitious and potentially contentious. This includes removing the city's existing restriction on chain stores on California Avenue, a policy that the council adopted in 2015 and that requires any business with 10 or more locations to apply for a special permit before they could set up shop. The idea was popular, with the council unanimously supporting the restriction and local merchants submitting a petition with more than 700 signatures supporting the restriction.

But the Streetsense report suggests that it may be time to revisit the regulations. The consultants specifically recommend that the city narrow down the prohibition so that it applies exclusively to food and beverage tenants. The existing restriction, the report notes, "may eliminate retail concepts that may be new to the region.

"These formula retail concepts help drive customer interest and, more importantly, foot traffic, which helps all businesses in the district," the report states.

Consultants are also recommending that the city scrap its retail-preservation ordinance, which was also adopted in 2015. The law prohibits retail space from being used by non-retail businesses in the city's prime commercial areas. The council adopted the ordinance after numerous downtown businesses, including Zibibbo, Jungle Copy and Fraiche Yogurt, shut down and were subsequently converted to offices.

In passing the law, council members had argued that retail operations have a hard time competing with offices, which fetch far higher rents for landlords. But the Streetsense report calls the ordinance a "blunt rule that was created in response to temporary market conditions." The consultants note that Palo Alto's commercial climate has changed since those days, with office vacancies climbing from under 3% to a current level of 14%.

"With office occupancy rates not expected to fully recover to post-pandemic levels in the foreseeable future, the threat of retail space conversion to office is minimal, and the ordinance should be reevaluated, especially in districts experiencing higher vacancy than others," the report states.

The council's pushback

The report's recommendations are expected to kick off fresh debate among council members and business leaders about the city's retail laws. The council showed little appetite during its March discussion about making any sweeping changes.

"There's a reason why these regulations are in place, and, at least in the past, they reflected community values and desires," Vice Mayor Greer Stone said at that time.

Many of the recommendations in the report are based on an assumption that the city currently has too many retail spaces for a daytime population that has sharply decreased during the pandemic, as more employees opted to work remotely.

The consultants estimate that hybrid work has reduced the demand for retail in Palo Alto by more than 100,000 square feet, roughly equivalent to the amount of space at Midtown and Charleston shopping centers. The report also found that Palo Alto's six main shopping areas – Stanford Shopping Center, downtown, California Avenue, Town & Country Village, Midtown Shopping Center and Charleston Shopping Center – had a vacancy rate of 8% or 243,000 square feet by the end of 2022.

"The reduction in Palo Alto's daytime population means less spending available to support retailers," the report states.

Though the report argued that retail demand will steadily increase as Palo Alto and neighboring cities add housing, consultants believe that without intervention demand will not reach parity with existing retail supply over the next decade.

Consultants recommend a reevaluation of both the retail-preservation ordinance and other zoning overlays that restrict land uses in commercial areas like downtown and California Avenue. Layers of regulation, the report argues,

"create further uncertainty and prolong the approval and permitting processes, which increases risk and cost of doing business, as compared to other municipalities within the region."

"In an environment where tenants have options, these policies make Palo Alto less appealing to tenants who can open stores in other cities with lower hurdles to market entry," the report states. "Notably, Palo Alto's most heavily regulated retail environments struggle the most with vacancies."

Some council members may not agree. In the past, they have argued that the main problem plaguing commercial areas isn't local regulations but market forces – namely, the tendency of large property owners to keep their buildings vacant until the office market turns around so they can lock in long-term tenants at higher rents than retailers would fetch.

Council member Pat Burt, who also served on the council in 2015, took that view in March when he challenged the consultant's conclusions about the viability of local retail-preservation laws. He cited past economic recessions in which retailers wanted to remain downtown but couldn't keep up with rents that property owners kept high in the expectation that office demand would rebound.

Burt also rejected the consultant's view that office demand is in permanent decline and suggested that there will be some realignment in the post-pandemic period. Some companies may, for example, opt for smaller spaces or more flexibility, he suggested during the March discussion.

"I'm concerned about drawing these kinds of conclusions in the firm way based upon an assumption that we're going to stay at the same amount of office occupancy that we have today," Burt said.

The one solution that the council is likely to embrace for spurring economic activity is adding housing in California and downtown areas. Yet it remains to be seen whether council members support a Streetsense recommendation to increase height and density in both areas, which would enable more mixed-use developments on small lots. The council has been more open in the past two years about granting exceptions to the city's 50-foot height limit for residential projects, particularly ones that include significant amounts of affordable housing.

The new report suggests revising the height and density rules for the entire districts and recommends an additional 10 to 12 feet in the downtown area, a change that would make redevelopment and construction of mixed-use projects more viable for landlords. Absent that option, which allows residential uses, property owners may not get enough commercial tenants to fill space above the ground floor.

"What's left is stagnation and decline unless more flexible options are considered," the report states.

What to do with vacant storefronts?

The consultants are also pushing back a policy that numerous council members currently favor: a vacancy tax. Council member Julie Lythcott-Haims was among those who suggested earlier this year that they'd like to impose a penalty on developers who keep their properties vacant for extended periods of time.

“Do you want to run a business in this city or do you not?" Lythcott-Haims said during an April discussion of the topic. "Because we need a vital city. You can’t sit and hold a place vacant for too long. It harms the city.”

Streetsense is arguing, however, that the reasons behind vacancies are "often numerous and multi-faceted and often related to conditions entirely beyond the control of a property owner."

"Additionally, in cities where such taxes have been levied, hardship exemptions are legally required and are not uncommon, creating yet another administrative hurdle for owners who may already be struggling," the report states. "Furthermore, the tax itself may simply become a new cost of doing business in Palo Alto, one that does not meaningfully change behavior or have an impact on the overall vacancy rate."

Instead of taxing vacant properties, consultants are urging the city to adopt an "incubation" program that partners property owners experiencing vacancies with small businesses looking to establish or expand their brick-and-mortar operations.

This could involve a nonprofit like the Urban Village Farmers Market Association, which operates regional farmer's markets. Some of its more successful vendors often seek to go beyond tents and establish more fixed operations, the report notes. The city could support these efforts through financial and technical assistance, according to the report.

Another option for "activating" vacant storefronts is through artwork. The report encourages the city to consider inviting artists, through grants or competition, to create art displays at properties that are between leases and to assist with "district branding" that would help market the city's commercial areas.

"This is particularly important in Downtown where regional competition for destination experiences is high," the report states.

Another change that Streetsense is recommending is simplifying the process for businesses that want to make minor improvements to their properties. The city's municipal code requires architectural review and approval for both major and minor changes, including landscaping, signage and parking improvements. Some of these changes, the consultants note, could be handled through a more streamlined over-the-counter approval process.

"For small businesses, the time and cost savings with over-the-counter approvals for minor changes potentially reduces uncertainty and risk, which may increase investor interest and contribution to a project," the report states.

If you're interested:

A discussion of the draft Comprehensive Economic Development Strategy is planned for Thursday, June 29, from 05:30 p.m. to 06:30 p.m. over Zoom.

This discussion is meant to engage residents to hear their perspective in advance of the strategy being presented to the City Council for adoption in August, according to the city's website.

The Zoom meeting will be held at streetsense.zoom.us/j/85889364466.