Palo Alto’s city council is considering a “vacancy tax” on empty shop space in its downtown, penalizing owners stuck with vacant buildings. Not widely heralded for its common sense, the Council reasons that landlords are behind our beleaguered downtown’s hollowing out. One council member crowed that greedy landlords are intentionally holding their buildings off the market in hopes of a better leasing climate in the future, of landing a premier tenant that is nowhere on today’s horizon.
That landlords are greedy is a truth universally held. However specious, one can employ this truth to refute the Council’s logic. An elementary grasp of arithmetic is to greed what ham is to eggs. And successful landlords tend to be better than most at totaling sums. If a landlord holds her building back for two years, hoping for that sunnier day, how much more rent must she then charge on her new five-year lease? If she could have rented her shop for $10,000 a year during the two-year waiting period, she must now charge $14,000 a year to net the same dollars over those seven years. Keeping it simple—ignoring the time value of money—rent must increase by 40 percent for the landlord to break even.
That landlords are greedy is a truth universally held
Owners run these numbers every day. Some may be a trifle on the slower side, but they’re not crazy. And it’s flat-out crazy to believe rents will majestically soar to offset years of lost income. With few exceptions, landlords are fighting hard today to lease their buildings, lowering their rents to catch the still falling—and failing—market.
No. Palo Alto’s problem is not withheld supply but a stunning lack of demand, a problem plaguing West Coast cities from Seattle to San Diego. What caused thousands of retailers to abandon urban centers? Start by blaming remote work. Office workers—the customers upon whom merchants rely—have disappeared. Our office buildings in Palo Alto are fully leased, but they are collectively—at best—15 percent occupied. Multiply that by scores of office buildings, and you have a nascent ghost town.
Crime is a close second to remote work as a cause of our urban cores’ decline. I walked into the CVS on University Avenue the other day. Everything worth stealing was locked away. Unfortunately, this is more of a deterrent to honest shoppers who must now find a harried clerk in order to buy razors than the persistent thieves. Theft has always bedeviled retailers, but historically it was more of a minor headache than a heart attack. That changed with California’s passage of Proposition 47, the law that allows thieves to steal up to $950 a day, 365 days a year, without going to jail. For details, my essay McNellis Partners | Stealing the Golden Gate may be useful.
The internet, the bad old internet, is blamed more often than remote work and theft as the principal cause of our vanishing merchants. But the pundits were wrong about the net: It never came close to killing retail, but it sure as hell changed it. Ask yourself what you now buy exclusively on the net, and then draw a chalk body outline around your local stores selling those items… By failing to recognize that the hat shops of today are fading into extinction, cities can delude themselves into clinging to their antiquated zoning. You can read more about it here: McNellis Partners | Retail: Robbing Peter to pay Paul.
The internet, remote work and theft are not unique to Palo Alto. The first two are national issues, while retail theft is a pandemic from Eureka to Chula Vista.
Unique to Palo Alto is its see-no-evil approach to its retail zoning. Palo Alto’s zoning limits uses in its retail districts to old-school retailers: those who sell stuff: hard goods like lamps or soft like dresses and sweaters. Mandating only “true retailers” in a shopping district is like building a birdhouse for passenger pigeons.
To return University Avenue to health, Palo Alto should forget about forcing landlords to “push string,” that is, to lease shops where no demand for them exists. Instead, the city needs to recognize that times have changed, and that so many retailers of yesteryear are gone, never to return. The city should shrink its retail district to fit this diminished demand and, at the same time, expand its zoning to allow every imaginable public-serving business: any business with a customer, a patient, a client, a student, any sort of visitor at all. Why? You can’t visit a chiropractor on the net. Palo Alto needs to drop its prohibition against financial services and allow dentists, travel agents, gyms, yoga studios, doctors—even brokerage offices—to occupy those otherwise unfillable retail storefronts.
Palo Alto can’t do much about remote work, and thanks to state laws, sadly little about property theft. But it can recognize that old-school retailers aren’t coming back. Until the City Council recognizes this, until it acknowledges that retail is as much about services as sales—until it lifts its archaic zoning—Palo Alto will suffer.
John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.
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To read more from McNellis, please consider his book Making It in Real Estate: Starting Out as a Developer. Also, you can now read McNellis’ Scout’s Honor, a dashing tale of a developer with a secret past, exclusively and for free on The Registry.
