To combat vacancies, Palo Alto may repeal ‘retail protection’ law

With Palo Alto businesses buckling during the economic shutdown, a bitterly divided City Council took an initial step on Monday toward repealing a local law that bars the conversion of ground-floor retail spaces to offices throughout the city.

In a surprising move that followed a long and wide-ranging debate about strategies to support the business community, the council directed staff by a 4-3 vote to return with an ordinance that would eliminate the citywide “retail preservation” ordinance. If the council moves ahead with the repeal, properties outside Palo Alto’s main commercial areas would be allowed to replace retail operations with offices or other commercial uses.

The controversial proposal was made by Mayor Adrian Fine, a longtime critic of the ordinance, who argued that the law is too geographically broad. His three colleagues from the council’s more pro-growth camp, Alison Cormack, Liz Kniss and Greg Tanaka, all supported the consideration of the repeal. The three council members who are more aligned with the “residentialist” camp, Vice Mayor Tom DuBois, Eric Filseth and Lydia Kou, vehemently opposed the move and suggested that the change could cause long-term damage to the retail community.

The council adopted the law in 2017, following the closure and/or relocation of several longtime downtown retailers and restaurants — including Fraiche, Zibibbo and Jungle Copy — and their subsequent conversion to office use. After passing an emergency ordinance in 2015 to prohibit such conversions, the council moved in 2017 to make the restriction permanent. At that time, Fine, Kniss and Tanaka all opposed the new ordinance.

On Monday night, in a broad discussion that was listed on the council’s agenda as a “verbal update” on the city’s efforts to help businesses during the COVID-19 pandemic, the three opponents of the ordinance were joined by Cormack in a vote to reconsider the law.

Proponents of the change argued that the city doesn’t have any real expertise in retail, that some sites are not naturally suited for retail and that property owners should have more flexibility when it comes to uses at a time when the economic shutdown is ravaging the business community.

“I don’t think it’s helping us,” Fine said of the 2017 ordinance.

Fine proposed reversing the 2017 action and limiting the restriction on retail conversions to commercial cores such as downtown and California Avenue. While the vote doesn’t immediately kill the ordinance, it directs staff to return with an ordinance that would do so, which will be voted on at a later date.

Fine also argued that the city needs to take a “more open” attitude toward the different types of retail businesses and to not micromanage details such as window designs. He cited the example of Sephora, which was planning to set up a beauty supply shop in downtown Palo Alto but had to delay its opening because it couldn’t cover its windows to prevent products from melting, Fine said.

“I think we need to take a more open attitude toward what retail types are there, whether it’s Sephora or a gym,” Fine said.

While Fine’s motion specified that the removal of the citywide retail-protection ordinance would be temporary, opponents of his proposal argued that the distinction is meaningless because property owners would be able to convert to office use and then retain their use in perpetuity. Filseth argued that even a “temporary” suspension would lead to long-lasting results.

“It’s hard for me to see how getting rid of a retail ordinance will try to help retail,” Filseth said.

Kou argued that by reducing the scope of the retail-protection ordinance, the city is effectively allowing property owners to switch from retail to a more lucrative use, which in most cases is offices.

“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 the right thing to do.”

The council similarly split 4-3 on a proposal by Fine to relax parking rules for businesses when they change use. He pointed to the example of the Palo Alto Baking Company, a California Avenue bakery that shut down at the end of 2018 and which has not been replaced. The challenge, he said, is that potential retailers are unable to provide the extra parking that is required of them.

“Especially in a year where I don’t think parking is the highest concern, we may be looking at temporarily suspending that,” Fine said.

Other proposals to support the business community proved far less divisive. DuBois suggested exploring ways to greatly enhance COVID-19 testing, providing support for child care and coming up with strategies for holiday shopping in primary commercial areas. The council adopted all three proposals with little debate.

The council also agreed not to move ahead with some of the proposals that have come out from the business community, including reducing minimum wage, decreasing utility rates and opposing Proposition 15, which would create a “split roll” system in which property tax for commercial and industrial sites is based on market value rather than purchase price.

Despite the assertion by some business owners that the proposition would hurt them financially, the City Council endorsed staff recommendation that the city officially support Proposition 15, which allocates some of the property tax revenues to local governments and school districts.

DuBois also vehemently opposed any consideration of lowering the minimum wage, an idea that was brought up by Jim Ellis, managing principal of Ellis Partners, which owns Town & Country Village. DuBois said reducing the wage would be “somewhat immoral right now.”

“We’re talking about workers who are on the front lines — people at grocery stores and these other stores. They should probably be getting combat pay and getting paid more. I just can’t see us lowering their wage,” DuBois said.

The council largely supported most of the other efforts by staff to support local retail, which includes $10,000 grants to small businesses and the closure of University and California avenues to traffic as part of the city’s Uplift Local campaign (previously known as Summer Streets). So far, the efforts appear to be having positive, if uneven results, with some restaurants along the main commercial stretches reporting a healthy uptick in businesses while others, particularly those on side streets, saying that the closures are hurting their business by putting them at a competitive disadvantage.

For Town & Country, the challenge of the pandemic is compounded by the fact that many of its shoppers come from Palo Alto High School and Stanford University, institutions that have been more or less shut down for the past six months. Ellis said sales at the shopping center are down this month by 60% to 80% when compared to last year. And while the shopping center went into the pandemic with a vacancy rate of between 6% and 7%, the rate currently stands at 15% and appears to be heading toward 20% to 25%.

“It’s important to acknowledge that many of these businesses won’t open,” Ellis said. “And it isn’t because the landlord won’t talk to them and isn’t willing to defer, abate or rework their rent. It’s because they’ve been closed for such an extended period of time and they are really — even though general retail businesses are open — unable to receive customers.”

Find comprehensive coverage on the Midpeninsula’s response to the new coronavirus by Palo Alto Online, the Mountain View Voice and the Almanac here.