By admin 
Thanks to John McNellis.
The Palo Alto City Council is considering implementing a “vacancy tax” on vacant downtown retail space, penalizing owners stuck in vacant buildings. The Council is not universally praised for its common sense, but reasons that landlords are behind the erosion of our beleaguered city center. One councilor crowed that greedy landlords are deliberately keeping their buildings off the market in hopes of a better rental climate in the future, to bring in prime tenants that are nowhere to be found today.
That landlords are greedy is a universally accepted truth. As misleading as this truth is, you can use this truth to refute the logic of the Council. A basic concept of arithmetic, greed is what ham is to eggs. And successful landlords are usually better at adding up amounts than most. If a landlord holds onto her building for two years in hopes of that sunnier day, how much more rent should she charge on her new five-year lease? If she could have rented her store for $10,000 per year during the two-year waiting period, she now has to charge $14,000 per year to make the same dollars over those seven years. To keep it simple – without taking into account the time value of money – the rent must increase by 40 percent before the landlord can break even.
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Owners run these numbers every day. Some may be a little slower, but they’re not crazy. And it is downright insane to believe that rents will rise majestically to compensate for years of lost income. With few exceptions, landlords today are fighting hard to rent out their buildings, lowering their rents to accommodate the still declining – and failing – market.
No. Palo Alto’s problem is not a lack of supply, but a stunning lack of demand, a problem plaguing cities on the West Coast from Seattle to San Diego. What caused thousands of retailers to leave urban centers? Start by blaming remote work. Office workers – the customers traders rely on – have disappeared. Our own office buildings in Palo Alto are fully leased, but collectively – at best – are 15 percent occupied. Multiply that by dozens of office buildings and you have a burgeoning ghost town.
Crime is second only to remote work as a cause of the decline of our urban cores. I walked into the CVS on University Avenue the other day. Everything worth stealing was locked away. Unfortunately, this is more of a deterrent for honest buyers who now have to find a harried clerk to buy razors than for the persistent thieves. Theft has always caused problems for retailers, but historically it has been more of a minor headache than a heart attack. That changed when California passed Proposition 47, the law that allows thieves to steal up to $950 a day, 365 days a year, without going to jail.
The Internet, the bad old Internet, is more likely than remote working and theft to be the main cause of our disappearing merchants. But the experts were wrong about the Internet: It never came close to killing retail, but it certainly changed it. Ask yourself what you currently buy exclusively on the Internet and then draw in chalk the outline of your local stores that sell these items. … By failing to recognize that today’s hat shops are in danger of extinction, cities may be fooling themselves by clinging to their outdated zoning laws.
The internet, remote work and theft are not unique to Palo Alto. The first two are national problems, while shoplifting is a pandemic from Eureka to Chula Vista.
Unique to Palo Alto is its see-no-evil approach to retail zoning. Palo Alto’s zoning code limits uses in its shopping areas to old school retailers: those who sell stuff: hard goods such as lamps or soft goods such as dresses and sweaters. Nowadays, requiring only “real retailers” in a shopping area is like building a birdhouse for passenger pigeons.
To make University Avenue healthy again, Palo Alto should forget about forcing landlords to “pull the strings,” that is, rent out stores where there is no demand. Instead, the city must recognize that times have changed, that so many of the retailers of yesteryear are gone, never to return. The city would have to shrink its shopping district to meet this reduced demand and at the same time expand its zoning to accommodate every conceivable public business: any business with a customer, a patient, a customer, a student, any visitor. not at all. Why? You cannot visit a chiropractor over the internet. Palo Alto should drop its ban on financial services and allow dentists, travel agencies, gyms, yoga studios, doctors – even real estate agencies – to occupy those otherwise unfillable storefronts.
Palo Alto can’t do much about remote work, and unfortunately, little about property theft thanks to state laws. But it can recognize that old-fashioned retailers are not coming back. Until the city council recognizes this, until it recognizes that retail is as much about services as it is about sales — until it eliminates its archaic zoning ordinance — Palo Alto will suffer.
Palo Alto developer John McNellis, author of “Making it in Real Estate,” an industry bestseller, is co-founder of McNellis Partners and a noted retail real estate expert. He can be reached at [email protected].