Even before the COVID-19 pandemic began to shut down local businesses last March, the Town & Country Village was staring into a murky future.
With online shopping on a steady rise, the shopping center's boutique shops have taken a hit and the shopping center's retail vacancy rate had risen from 1.4% in 2018 to 8.2% in 2019, according to Jim Ellis, whose company, Ellis Partners, owns the mall. While it dipped back down to 4.6%, the economic shutdown that began in March has since forced many retailers and restaurants to shut down. Mayfield Bakery & Café, GNC, Patrick James, Sweaty Betty, SpaceNK and Ella are among the businesses that have shuttered during the pandemic.
Today, the vacancy rate is at about 21% and is expected to rise, Ellis said.
To address this trend, Ellis Partners is proposing a change that could permanently transform the popular shopping center: converting some of the retail spaces into medical offices. Last December, it requested that the city allow up to 20% of its ground-floor retail space to become medical offices, a use that is currently prohibited by the zoning code. It also requested that the city allow up to 30% of the shopping center's total space to be used for medical offices.
In explaining the explosion in vacancies, Ellis underscored Wednesday night that the trend began well before the pandemic, as online shopping began to grow in popularity. The past year has turned what was a major problem for Town & Country retailers into a "fatal" one, Ellis told the Planning and Transportation Commission during a public hearing on the request. Reducing rents, he said, hasn't helped.
"I don't know how much lower than zero our rents can go with some of the tenants," Ellis said. "We've been in constant contact with every tenant to try to help them and work with them best we can, within reason."
The commission responded to Ellis' request on Wednesday by supporting a zone change that would provide some flexibility for Town & Country, though not as much as the mall owners had hoped for. By a 3-2 vote, with commissioners Ed Lauing and Doria Summa dissenting, the commission recommended allowing up to 15% of the ground-floor retail area to switch to medical offices and specified that no more than 25.8% of total mall space can be used for office space.
Over the course of a lengthy debate, commissioners struggled to reconcile the need to help Town & Country, which they all acknowledged was a treasured asset, and the need to ensure that the mall remains primarily a retail center. Lauing and Summa both suggested that people are anxious to get out and support local businesses in person as soon as the pandemic ends. Adopting a change that would allow permanent conversions of retail spaces to medical offices is premature, they argued.
"I think the sad vacancy rates are predominantly because of the pandemic," Lauing said. "People are staying away from stores right now not because they don't like them; it's because they're locked in. … I think they want to be shoppers ASAP."
To allay some of these concerns, Commissioner Michael Alcheck proposed limiting Town & Country's medical-office tenants to those that sign their leases in 2021 and barring them from lease commitments that extend beyond 10 years. With the commission deadlocked over whether it should approve any changes, the two members who were more sympathetic to Town & Country's request — Chair Bart Hechtman and Commissioner Cari Templeton — agreed to include these provisions in the panel's recommendation.
If the council adopts the commission's recommendation, Town & Country would be able to lease space to medical practices such as clinics, dental offices and acupuncture specialists, among others.
Dean Rubinson, director of development at Ellis Partners, wrote in his request for the zone change that "allowing for those types of medical services will allow Town & Country Village to offer more reasons to visit the property for these needs and to stay and shop for other goods and services in Palo Alto. It will also give the shopping center "a much better chance of returning this cherished property to its pre-Covid occupancy levels."
Town & Country, he said, is now "in the red" and it continues to get deeper in the red every week, Rubinson said Wednesday. While he acknowledged the commission's preference to consider citywide strategies for supporting retail rather than approving zone changes that would benefit a single shopping area, Rubinson also suggested that Ellis Partners might have to sell the mall to a bank or a national mall chain if its request is rejected.
"We want be the curators of Town & Country for another 15 years," Rubinson said. "That may not happen if we don't have some flexibility here."
Not everyone was swayed by this argument. Summa suggested that Town & Country's proposed cure may be "worse than the sickness" and that allowing medical clinics would effectively kill what's special about the shopping center. She also alluded to the shopping center's close proximity to both the Palo Alto Medical Foundation and the Stanford University Medical Center.
"I think there's a better way to do that that wouldn't be as permanent and be more flexible," Summa said. "I'm really concerned about having medical offices in this location, when we have a very large medical facility right next door and a huge medical facility a quarter-mile away."
Hechtman said that while he likes the idea championed by Alcheck and Lauing of coming up with a holistic retail strategy for the entire city, he also supported giving Town & Country some near-term relief. He noted that in the two decades since Ellis Company took ownership of Town & Country, the shopping center transformed from a "sleepy" area to one that was buzzing with activity before the pandemic.
"I think it has added something to the fabric of Palo Alto," Hechtman said.
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