With the retail scene at Town & Country Village reeling from the effects of COVID-19, the shopping center's owners are looking to medical offices for a cure.
Under the proposal that Ellis Partners presented to a somewhat skeptical City Council on Monday, the shopping center at the corner of El Camino Real and Embarcadero Road would be able to fill up to 10% of its retail space — or about 15,000 square feet — with uses such as medical clinics like One Health, acupuncture practices and medical spas.
The shopping center's struggles predate the pandemic, said Dean Rubinson, director of development at Ellis Partners. In 2016 and 2017, retailers that focus on apparel, toy shops, cosmetics stores and bookstores saw their sales fall as e-commerce became more dominant. That trend, he said, prompted a spike in the city's vacancy rate from 1.4% in 2018 to 8.2% in 2019. The vacancy rate then dipped to 4.6% in 2020 before spiking to 18.6% this past January, largely because of the second threat: the COVID-19 pandemic.
Now, with establishments such as Mayfield Bakery, Sweaty Betty and Patrick James recently departing, the vacancy rate stands at 22.9% and Ellis Partners believes conditions will get worse before they get better. Before the pandemic, the shopping center had 68 tenants. Today, it has 50, Rubinson said. The company has worked with the shopping center's tenants to restructure leases or to offer rent abatements, said Jim Ellis, managing partner at Ellis Partners. In most cases, these involved reducing rents by between 30% and 50%, he said.
Rubinson said the company has done "everything we can" to keep retailers from leaving.
"We have treated our tenants fairly. We care very much about this asset and we believe that really allowing medical office use to some degree is a significant part of the solution to prevent a death spiral of Town & Country," Rubinson said. "Town & Country relies on foot traffic and medical office uses will be a very important complement in the solution creating a future for Town & Country."
The council, however, did not entirely buy the explanation. While several members, most notably Alison Cormack and Greg Tanaka, supported giving Town & Country more flexibility to introduce medical uses, most of their colleagues suggested that medical offices would constitute a permanent solution for a temporary problem.
Council member Greer Stone was among the skeptics. He challenged Ellis' narrative and suggested that the shopping center's relatively low vacancy rate in 2019 belies its assertions that e-commerce poses a significant threat to its retail scene. With COVID-19 vaccinations underway and students preparing to return to Palo Alto High School and Stanford University in the coming months, business will pick up, Stone said.
"It just seems clear the current vacancy rate is at the result of the pandemic and we'll likely see a dramatic change to their vacancy rate in the coming months," Stone said.
Council member Lydia Kou agreed and suggested that many other types of businesses throughout the city are facing problems similar to those at Town & Country. As such, the council should focus on strategies that benefit businesses throughout the city, rather than a single property owner.
"I truly think we are jumping the gun (by) looking at this first," Kou said. "We should be looking at the entire program comprehensively and then going about making a decision with more information to help us decide."
Vice Mayor Pat Burt offered what he called a "modest compromise": a condition that would only allow Ellis Partners to sign leases with medical services over the next two years.
"I think that we want to strike a balance between retaining a true retail atmosphere and acknowledging some transition in the different forms of retail that are occurring," Burt said. "And even though I think that we will see some significant rebound from where we are right now, we have an uncertain future in retail."
His proposal fell by a 3-4 vote, with only Cormack and Tanaka joining him. With most members showing little appetite for losing any retail space, a split council settled for a more conservative approach: directing its Planning and Transportation Commission to craft a definition for "retail medical services." Once that's done, the council would consider whether to allow businesses that fall under this definition to set up shop at Town & Country.
The swing vote was Stone, who opposed the initial motion but supported the revised one that sent the issue back to the Planning and Transportation Commission. Kou, council member Eric Filseth and Mayor Tom DuBois voted against both motions. DuBois suggested that the proposal for medical offices at Town & Country runs directly against the council's goal of protecting retail.
"It's hard to imagine where we'd protect retail if not in the retail shopping center," DuBois said.
While the council's vote falls well short of what Ellis Partners was looking for, it leaves the door ajar for allowing a wider range of uses in the future, both at Town & Country and at other locations. It also remits the issue back to a planning commission that has already spent considerable time and energy in debating the proposal. At its Feb. 10 meeting, the commission rejected an earlier request to allow 20% of Town & Country ground floor space to be converted to medical use but approved the conversion of 14% of ground-floor spaces for such use. The commission, which was split on the issue, also stipulated that all of these tenants would have to be signed in the first year and that Town & Country would not be allowed to extend the leases.
After the planning commission's review, Ellis Partners revised its proposal to limit medical service to 10% of the shopping center's ground-floor space and to remove any stipulations that would make the switch temporary. The city's planning staff also came out against the term limit, noting in a report that this may "require the termination of a successful business in 10 years, may be disruptive to residents using those medical services and upfront tenant improvement costs may discourage some tenants from signing a lease that cannot be extended."
While the council's vote on Monday allows the conversation to continue, it does not commit the council to approve medical uses at the shopping center. Stone noted that even with the more conservative approach, he may not support the conversions proposed by Ellis Partners.
Tanaka, meanwhile, strongly supported allowing medical uses, which he suggested will create move foot traffic at Town & Country and provide a tangible benefit for local residents, some of whom may take advantage of these services. Converting some retail into medical uses can be "a win-win from multiple angles," he said.
"I hope we can try this experiment because I think we really need it right now, especially given the really, really uncertain economic times," Tanaka said.
Find comprehensive coverage on the Midpeninsula's response to the new coronavirus by Palo Alto Online, the Mountain View Voice and the Almanac here.