What would it take to get affordable housing built in Palo Alto?
It's a question that members of the City Council have been wrestling with for at least five years, as they repeatedly name housing a priority and then inevitably fail to meet their annual goals for new units. On Monday night, they finally began to get some answers.
A new report by the consulting firm Strategic Economics examined the city's existing zoning regulations, evaluated the costs of construction, estimated the rate of return on new developments in various zones and concluded that a reasonable place to start is loosening the city's parking rules and retail requirements.
The city commissioned its report as part of an effort to revise its "inclusionary housing" ordinance, which requires homebuilders to dedicate a percentage of their units to below-market-rate housing. Council members have suggested in the past that the city raise the requirement from 15% to 20%. They have also considered extending the requirement to rental housing (today, it only applies to ownership units).
The new report urges caution on both fronts. It indicates that while the city could see some housing production in the downtown area, particularly for ownership units like townhouses and condominiums, it would likely have to make numerous zoning revisions to make below-market-rate housing projects pencil out. The prospects are even less promising for rental units, which are unlikely to achieve a high enough rate of return for developers to justify construction under the current regulations, the report suggests.
The analysis also states that what works in the downtown core may not work in other commercial areas, such as the "service commercial" zoned sites along El Camino Real. Even with no inclusionary housing, rental developments in these low-density zones would generate an estimated rate of return of about 4.38%, according to the analysis, below the 4.75% benchmark for feasibility.
For Palo Alto, the new report's findings come at a time when the city is bracing for aggressive new regional housing mandates and coming off a yearslong drought in housing construction. The city is about 1,000 housing units short of where it should be if it were on pace to meet its Comprehensive Plan goal, according to Planning Director Jonathan Lait.
Since 2015, Palo Alto has permitted 572 units, Lait told the council. To remain on pace, it would have needed to generate about 1,593 units by this time.
Given the housing shortage, the council majority agreed Monday night that the report's recommendations offer a good starting point for zone changes. Armed with the new analysis, the council voted not to increase the inclusionary housing requirement for ownership units at this time but to consider adjustments to parking and retail standards that would make a future increase viable. The council also directed staff to consider other zoning amendments — including changes to density limits — that could support a future inclusionary requirement of 20%.
The council voted 6-1, with Councilwoman Lydia Kou dissenting, to pursue the various zone changes. In doing so, council members acknowledged that they are unlikely to see new housing without making compromises on development standards.
"Something has to give," said Councilwoman Liz Kniss, "Something. Maybe your height gives, maybe your parking gives, something has got to give if you really believe that you want more housing and that you want inclusionary housing."
Currently, an applicant looking to redevelop a building with a retail component is required to replace all of the retail square footage. The proposed change would require the developer to only provide 1,500 square feet of retail. Parking standards, which currently vary by zone, would be reduced to one space per unit.
The three members on the council's more slow-growth wing were more reluctant to move ahead with zone changes. Councilman Eric Filseth suggested a more holistic approach that considers a wider range of factors that the city can adjust to make the economics work, including density regulations. Using the model supplied by Strategic Economics, Filseth created his own spreadsheet that allows users to modify different factors, including rent, height and density of the development, and projects the rate of return.
Filseth said he'd like to consider other factors besides economics — most notably, parking demand — when revising the downtown's parking standards.
"I think we ought to be looking at demand as opposed to how we can improve development economics," Filseth said. "We can improve developer economics by not requiring plumbing and electricity too."
Vice Mayor Tom DuBois suggested that to create new affordable units, the city should require builders of rental properties to construct inclusionary units, rather than buy their way out through in-lieu fees.
"We need to get away from in-lieu fees, impact fees," DuBois said. "We're seeing mostly rental projects for affordable housing. If we have no inclusionary requirements, I don't think we'll get inclusionary units in those rentals."
His proposal to develop an inclusionary-housing requirement for rental housing — what's known as the "Palmer fix" — fell by a 3-4 vote, with only Kou and Filseth joining him. Mayor Adrian Fine, who made the motion to move ahead with the loosening of zoning regulations, pointed to the study as evidence that the type of reform DuBois is recommending simply would not pan out economically.
"It's unfortunate, I regret that, I do not like that. But requiring 15% of units and making them economically infeasible means we'll get 15% of zero," Fine said.
In addition to directing staff to tweak the zoning regulations, the council also authorized the use of a blunter and less predictable tool: the newly created "planned home" zone. Modeled after the discarded "planned community" zone, the new designation allows developers to directly negotiate with the city over the zoning concessions they'd like to receive in exchange for public benefits. Unlike with the planned-community zone, which the city suspended in late 2013 and which often involved amenities such as grocery stores, fountains and public art as benefits, the planned-home zone would specify that the chief benefit is housing.
By a 4-3 vote, with DuBois, Filseth and Kou dissenting, the council supported an approach in which applicants using the "planned home" zone are required to provide the equivalent 20% of the units at below market rate. The exact number of units would depend on the affordability level so that a developer who opts to build for those in the "moderate" income would have to supply more such units than one building in the "low" or "very-low" income categories.
Fine called the new tool the city's "challenge zoning," with developers invited to come forward with their own proposals for zoning concessions. Kniss, who strongly supported the new zoning tool, cited the city's recent failure to generate housing as a reason to explore new approaches.
"We have selected housing as an absolute top priority as a council and it doesn't happen, year after year," Kniss said. "That is the definition of insanity — you keep doing it over and over again. And we keep doing it.
But while she, Fine and council members Alison Cormack and Greg Tanaka all supported this approach, the three dissenting council members suggested that the new zone is too open-ended and, as such, likely to engender the same type of distrust that doomed the planned-community zone.
Kou suggested that if the city uses this zone and designates housing as a "public benefit," the projects should be 100% affordable, rather than the 20% favored by the council majority. Filseth pointed to prior criticism from residents that when it comes to planned-community developments, the city is routinely out-negotiated by applicants.
"We're going to end up inherently dipping a toe into those waters again," Filseth said.