Seeking to stem the economic damage from the COVID-19 pandemic, Palo Alto is weighing a measure that could shake up the local retail scene: allowing banks, law firms and other office uses to replace shops and restaurants in many parts of the city.
The proposal, which the City Council will consider on Nov. 9, would modify the city's definitions of "retail" and "retail-like" uses to encompass medical offices, educational uses, banks, law firms, accounting firms and real estate agents, among other types of offices. It also calls for imposing size limitations on these office uses to make sure they don't occupy too much space in commercial corridors.
In addition, the council will consider another zoning change that would suspend an existing prohibition on converting ground-floor retail spaces to other uses when a property gets redeveloped. While downtown, the California Avenue business district and other key commercial areas (including Town & Country Village, Stanford Shopping Center and a segment of Middlefield Road in Midtown) will retain their ground-floor retail requirements — albeit, with an expanded definition of "retail" — property owners in other parts of the city would be allowed to shift from retail to the more lucrative office uses.
If approved, the changes would represent a dramatic shift of direction for the council, which has enacted numerous laws over the past five years to protect retail establishments from office conversions. In 2015, the council responded to conversions of downtown eateries and retailers — including Zibbibo, Rudy's Pub and Jungle Copy — to office spaces by passing an emergency law banning conversations of ground-floor retail. Two years later, a divided council moved to make the retail-preservation law permanent, despite arguments from developers, business leaders and some council members that the law is too broad.
Now, the three council members who dissented in the 2017 vote — Mayor Adrian Fine, Liz Kniss and Greg Tanaka — will have a chance to scuttle that law just before their terms conclude. Fine has opted not to run for reelection; Kniss is concluding her second and final term; and Tanaka is now running for a fresh four-year term.
The council signaled its desire to reconsider the office protection during a broad-ranging discussion on Sept. 15 about ways to support local businesses at a time when many have seen crippling losses because of the pandemic and Santa Clara County's shelter-in-place orders. The city has tried to alleviate some of the damage by offering grants to small businesses, closing University and California avenues to traffic to facilitate outdoor dining and streamlining the approval process for parklets and sidewalk tables.
Among the decisions that the council will consider on Nov. 9 is whether to keep these commercial stretches car-free until the end of the year, as current plans call for, or to extend closures until the end of March.
While the city has plenty of leeway to shift gears when it comes to street closures, other changes in the new recovery plan would be harder to reverse. The planned modification of the ground-floor preservation law, for example, is intended to provide temporary flexibility to property owners at a time when the retail sector is struggling. Even so, staff and council members acknowledged during their Sept. 15 discussion that once an office use gets established at a retail site, it would be able to retain this use indefinitely.
A new report from the Department of Planning and Community Services doesn't specify the duration of the proposed zone change to eliminate retail protections. It notes, however, the challenges of allowing land uses on a temporary basis.
"A tenant would need some assurance that the use could continue for as long as it occupied the site or for some reasonable period of time," the report states. "This may also limit the transferability of leases and may create confusion about the ability of other future uses to occupy the same tenant location."
The report notes that establishing a program that would allow land uses on a temporary basis would be "problematic" to administer and can lead to "property owner and tenant frustration after the temporary allowance has lapsed." Allowing uses on a permanent basis, meanwhile, "expands the opportunity for a greater exchange of retail and retail-like uses within retail preservation."
While the zone changes are being proposed as part of Palo Alto's pandemic response, some supporters of the move had advocated for changing the retail-protection rules long before the pandemic. Fine had long maintained that a citywide ordinance requiring ground-floor retail is far too broad. During the Sept. 15 discussion, Fine called the council's passage of the 2017 law a "poor move" and recommended a temporary suspension of the rule. Some commercial sites, he argued, just aren't well suited for retail.
"There are a number of sites outside of (the commercial core areas) that were not naturally retail, that we waived the requirement for and that remained vacant," Fine said. "In this economic environment, we should be looking at temporarily suspending that ordinance outside the retail cores."
Others on the council strongly opposed the move. Council member Lydia Kou, who is also seeking a fresh term in the Nov. 3 election, joined Vice Mayor Tom DuBois and Council member Eric Filseth in expressing opposition to the proposed suspension of retail-protection rules. The three council members, who make up the council's slow-growth wing, all supported the 2017 retail protections and voted on Sept. 15 to not move ahead with the proposed repeal.
"COVID aside, demand is going to come back one of these days," Filseth said at the meeting. "Temporarily suspending retail — that's not temporary."
Kou also said she is concerned about the permanent impacts of the proposed policy change and the potential of office uses, which fetch significant more rent, to replace retail.
"We're letting property owners dictate to us what they're looking for on their site versus what we want our city to become," Kou said. "I don't think it's right to do it that way."
The city's planning staff, meanwhile, suggest in the new report that Palo Alto can actually strengthen the overall business environment by focusing retail on the core districts of downtown, California Avenue and the Midtown shopping area and by giving other neighborhoods more flexibility to switch to other uses. Requiring retail preservation throughout the city, the report states, "may dilute the vibrancy and viability of retail areas and ultimately harm the overall retail environment."
Requiring retail preservation only in the core areas, the report states, would allow the city to "ensure these areas remain vibrant, pedestrian-focused retail areas that provide a sense of place and identity in Palo Alto."
The report notes that while some industries have been able to adapt to the current conditions, many retailers have been "severely challenged" and, in many cases, forced to cease operations permanently. That point was underscored at the Sept. 15 meeting by Jim Ellis, whose firm Ellis Partners owns Town & Country Village. The vacancy rate at the shopping center spiked from 6% to 7% before COVID-19 to 15%, with recent closures of businesses such as Mayfield Bakery & Cafe and Patrick James.
Ellis told the council that he expects the rate to climb to around 20% to 25%.
"Many tenants are still up for the challenge," Ellis said. "I have to be honest, there are tenants who are having trouble finding the inspiration and energy to try to operate through this environment."
Now, the shopping center is requesting zoning exemptions that would allow it to convert 20% of its ground-floor space to medical office uses and to allow up to 30% of its total space to be office uses. That 30% would include both the new ground-floor medical offices and existing office uses currently at Town & Country above the ground floor.
The council will consider the request from Town & Country as part of its Nov. 9 discussion of retail preservation.