Council to revisit Downtown Commercial Cap

Would enforcing the Cap help us get more housing downtown?

February 8, 2019, by Palo Alto Matters

Downtown commercial growth
Since 2005, the city has approved from 220,000 to 230,000 square feet of downtown commercial space as compared to only 65,000 square feet added in the previous fifteen years.

The City Council is poised to repeal the Downtown Commercial Cap in Monday, February 11 with potentially major impacts on commercial and housing development downtown. Many Palo Altans don’t know about the Downtown Commercial Cap or understandably confuse it with Palo Alto’s other commercial caps. So we thought it was time to get you up to speed on how the Downtown Cap fits into the big picture of land use management in the city. Read on or scroll down to learn why the Downtown Cap is suddenly a big deal and where our public officials stand on it.

With the profit margin for commercial space well above that for most housing, the right combination of commercial controls and housing incentives could be key to tilting our jobs/housing imbalance.

COMMERCIAL DEVELOPMENT CAPS

Having struggled for several decades with an outsized jobs to housing ratio and the negative local impacts it creates, the city over the years has created three major limitations on commercial (jobs producing) development:

  • City-wide Cumulative Cap:  Imposes an 850,000 square foot limit on the total amount of office and research-and-development growth in the city by the year 2030 (excluding medical offices in the vicinity of Stanford Medical Center). The City-wide Cap was reduced from 1.7 million new square feet in response to a citizens initiative in the summer of 2018. The lower Cap equates to an annual average of about 57,000 new square feet of office/R&D.
  • Annual Limit: Regulates the pace of office/R&D growth in the California Avenue, downtown, and El Camino Real areas by limiting project approvals to 50,000 square feet of office/R&D development in a single year. The Annual Limit does, however, permit unused square footage to be rolled over and added to the subsequent year’s allowable growth and includes some exemptions. 
  • Downtown Commercial Cap: A cumulative limit on the total amount of new commercial development specifically in the downtown district. This Downtown Cap applies to all new non-residential development (e.g., office, R&D, hotel, retail, etc.). Once 350,000 square feet of new commercial development has been approved (relative to a May 1986 baseline), a one-year moratorium is imposed, preventing new downtown commercial floor area for one year while the city undertakes study and implementation of appropriate new regulations to manage downtown land use and its impacts. 

HOUSING DEVELOPMENT INCENTIVES

The city recently created substantial new incentives designed to make housing development more economically attractive and feasible. In addition to new Affordable and Workforce Housing Overlays, the newly approved Housing Ordinance makes major changes throughout the zoning code, including the downtown district, that convey millions of dollars worth of value by reducing development standards for parking, density, size, and the like for both new and existing residential and mixed-use projects. 

However, private economic incentives continue to strongly favor office over housing development downtown (higher rents per square foot offer greater return on investment for developers/owners). The city’s recent Downtown Development Evaluation Residential Capacity and Feasibility Analysis (October 2017) concluded that “the strength of competing uses (specifically for office space)” is one of the primary barriers to significant residential development in downtown Palo Alto. Indeed, the city itself speculated in a recent staff report that the new Housing Ordinance “is not likely to persuade a land owner redeveloping their property to build residential housing instead of commercial.”

WHY THE URGENCY AROUND THE DOWNTOWN CAP?

The goal of controlling commercial growth embodied in the 33-year old Downtown Commercial Cap ordinance is about to become real. City staff estimates that only about 18,000 square feet of commercial growth remains allowable under the Cap. Once that 18,000 square feet are consumed, the moratorium will kick in, preventing any new non-residential development downtown for one year (or more if extended), while appropriate new policies are designed and implemented. That means the proposed conversion of the President Hotel Apartments to a hotel, which given its size “would puncture the cap,” must wait, as must other new office, retail, or other commercial projects. On the other hand, allowing little or no commercial expansion downtown, even temporarily, could encourage developers to switch to housing, especially given the new housing incentives.

Whatever the council does on Monday night will have prompt and lasting impact. They could repeal the Downtown Cap, rendering meaningless its longtime promise of controlling downtown commercial growth on the eve of fulfillment. They could retain the Cap and hold downtown commercial development static while the city figures out whether and/or how to accommodate more commercial growth. Or they could direct staff to return with a proposal to revise the Cap to prioritize current community needs and preferences such as enabling additional commercial growth only for local-serving retail and services. Whichever way they go, it could largely determine how much new housing gets built.

HOW WE GOT HERE

The city passed the Downtown Commercial Cap ordinance in 1986 due to widespread concern about negative community impacts from unfettered downtown commercial growth. The 350,000 square foot limit allows about 10 percent growth beyond the total downtown commercial square footage existing as of 1986. That Downtown Cap was later embedded in the city’s 1998 Comprehensive Plan and updated in the zoning code in 2006.

Consistent with the law, once cumulative approvals of new non-residential floor area reached 235,000 square feet, the city commissioned a study in 2013 to reevaluate the limit. The Downtown Development Study was to be completed in two-phases: a data collection and projection analysis Phase I, and a policy analysis Phase II to formulate appropriate response strategies. Phase I was completed and shared with City Council and the Planning and Transportation Commission in 2014 and 2015.

According to Monday night’s staff report however, work on the policy analysis Phase II was stayed in January 2017 when a slim 5-4 majority led by Cory Wolbach and Greg Scharff voted to eliminate the Downtown Cap from the city’s updated Comprehensive Plan. Without the benefit of the planned Phase II analysis, both council members and the community at large were denied the opportunity to consider informed policy alternatives.

Although no longer in the Comprehensive Plan, the city’s broad guiding policy framework, the Downtown Cap remains a city ordinance. Last summer, just as the controversy over the President Hotel was heating up, city staff brought a proposal to repeal the ordinance to the Planning and Transportation Commission. Staff interpreted City Council’s January 2017 action as signaling intent also to repeal the longstanding, underlying ordinance. Nonetheless, the PTC voted 4-0-1 against recommending repeal, primarily on the grounds that it seemed inconsistent with the city’s push to promote housing downtown and the groundswell of community support for the citizens initiative seeking to reduce office growth citywide. Now the fate of the Downtown Cap ordinance will return to council with Monday’s vote.

PRO OR CON?

Arguments against the Downtown Cap

Those seeking to repeal the Downtown Cap argue that the cap is too blunt an instrument. They contend that downtown’s transit resources make it a good place for commercial growth and that the City-wide Cumulative Cap together with the Annual Limit in the California Avenue, downtown and El Camino Real areas make the Downtown Commercial Cap unnecessary.

Arguments for the Downtown Cap

Supporters of the Downtown Cap counter that the concerns leading to its original enactment have been borne out, with significant downtown commercial growth exacerbating the jobs/housing imbalance, creating major traffic and parking problems, and contributing to spiking rents by squeezing out housing. Because the Citywide Cap and Annual Limit allow average annual office space to expand more and faster than the historic average, they assert that those tools are insufficient to slow commercial growth. Finally, they argue that enforcing the cap offers the best promise for actually getting needed, and vigorously prioritized, new housing downtown. If the Downtown Cap is repealed, the economic incentives favoring office growth will persist.

WHO STANDS WHERE?

Councilmembers Fine, Kniss, and Tanaka all voted to eliminate the Downtown Cap from the Comprehensive Plan in 2017 and Councilmembers Dubois, Filseth, and Kou voted to retain it. If those returning councilmembers maintain their position as to repeal of the Downtown Cap ordinance, that leaves newly elected Councilmember Alison Cormack as the swing vote. At a public debate during the campaign, she “didn’t see any reason to remove the Cap,” but cautioned that there may be details she didn’t know or wasn’t privy to. More recently, she has indicated in meetings with residents that her view of the issues has changed.

At the grassroots level, Palo Alto Neighborhoods (PAN) recently issued a call to action in support of keeping the Downtown Commercial Cap. 

If you have an opinion regarding repeal or retention of the Downtown Commercial Cap ordinance, or suggestions for a “third way,” be sure to share it with City Council. You can email the full council at city.council@cityofpaloalto.org or attend the City Council meeting on Monday, February 11 to speak or support others on the issue. The Downtown Cap item is scheduled for discussion beginning at 8:45 pm.

We found which Bay Area cities aren’t pulling their weight on housing

Curbed San Francisco – by Scott Lucas / October 12, 2017

An exclusive analysis of regional jobs and housing with surprising conclusions

When you look at the data, the cities that score the worst in building enough housing units for their workers aren’t Palo Alto and similar cities. It’s our biggest cities, like San Francisco and San Jose, that really drive the problem.

Here’s what we found.

Google demands more office space, threatens to block North Bayshore housing

The Mercury News – by Ethan Baron / September 27, 2017

MOUNTAIN VIEW — In a standoff with city officials, Google is demanding more office space for its futuristic new “Charleston East” campus and is threatening to block nearly 10,000 units of critically needed housing if it doesn’t get its way.

The company’s move could derail a plan — given preliminary approval by the Mountain View City Council early Wednesday morning and which Google says it still supports — for construction of 9,850 homes in the North Bayshore development anchored by Charleston East. The Mountain View search giant had earlier told the city it would work with partners to have 9,600 housing units built on its property, said Vice-Mayor Lenny Siegel.

Editorial: The shriveling office cap

Palo Alto Weekly – by the Palo Alto Weekly editorial board / September 8, 2017

Council’s split over office cap will surely return as an election issue next year

The irony and hypocrisy of this is that the same majority that voted Tuesday to make more commercial development easier has been advocating repeatedly for more housing. If there is one documentable result of the current office-cap restrictions, it is that it has led to more housing projects where office development would have otherwise been likely.

It is not hard to imagine voters becoming cynical about candidates who say their focus is on increasing the supply of housing while voting to make new commercial development, the major driver in demand for housing, easier.

Palo Alto relaxes limit on office development

Palo Alto Weekly – by Gennady Sheyner / September 6, 2017

Split council votes to give developers more flexibility, scraps ‘beauty contest’

After two years of sluggish commercial growth, the Palo Alto City Council moved Tuesday to loosen the city’s cap on office development so as to give builders more flexibility.

The City Council largely agreed that the city’s cap on office and research-and-development projects has been largely successful — for some, a little too much so. Adopted in October 2015, the cap applied to three prominent commercial areas — downtown, the California Avenue business district and along El Camino Real — and limited new development in these areas to 50,000 square feet per year.

Planning commission unanimously recommends office-cap extension

Palo Alto Weekly – by Elinor Aspegren and Shawna Chen / July 27, 2017

The Palo Alto Planning and Transportation Commission supported the city staff’s recommendation to extend the 50,000 square foot office-cap ordinance on Wednesday. Despite concerns about its long-term effects, all five commissioners present passed the motion with little debate….

Facebook’s “Village” plan raises questions

Palo Alto Daily Post – by Emily Mibach / July 12, 2017

Facebook’s proposal to develop a 59-acre business park on Willow Road in Menlo Park into a “Village” with homes, stores and 1.75 million square feet of office space doesn’t answer some major questions about housing and traffic.

Facebook unveils plans for giant new development in Menlo Park

The Almanac – by Kate Bradshaw / July 10. 2017

Company plans to build 3.45 million square feet of housing, office and retail space

Facebook, which hit 2 billion users June 27, has announced plans for a major new office, residential and retail development near its headquarters at Willow Road and Bayfront Expressway in Menlo Park.

“Young guns” out of step with community – Editorial

Palo Alto Matters – May 13, 2017

Councilmembers Wolbach, Tanaka and Fine have stretched their wings as part of the new Council majority with policy proposals that would worsen the city’s jobs/housing imbalance and shift parking and traffic burdens to residents. Along the way, they have employed tactics that sidestep City staff, exclude public input and forego opportunities for compromise, undermining public trust and repeatedly raising widespread and vocal community concern.

City Council changes course on housing fees

Palo Alto Weekly – by Gennady Sheyner / March 28, 2017

Council members spar over best way to fund affordable housing

In an unusual move that reflected Palo Alto’s shifting political dynamics, the City Council reversed on Monday night its December decision to significantly raise the fees that office developers must contribute to support affordable housing.