Loading...
HomeMy WebLinkAboutStaff Report 2512-5614CITY OF PALO ALTO Policy & Services Committee Special Meeting Tuesday, March 10, 2026 6:00 PM     Agenda Item     2.Consider Policy Options to Encourage Multi-Family Development in Mixed-Use Districts (2023-2031 Housing Element Program 3.9(A)) and Potential Recommendation for City Council on Next Steps. CEQA Status: The Addendum to the Comprehensive Plan Environmental Impact Report (EIR), approved by the City Council on April 15, 2024, analyzed potential environmental impacts of the 6th Cycle Housing Element including Program 3.9(A). Presentation Policy & Services Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Planning and Development Services Meeting Date: March 10, 2026 Report #:2512-5614 TITLE Consider Policy Options to Encourage Multi-Family Development in Mixed-Use Districts (2023- 2031 Housing Element Program 3.9(A)) and Potential Recommendation for City Council on Next Steps. CEQA Status: The Addendum to the Comprehensive Plan Environmental Impact Report (EIR), approved by the City Council on April 15, 2024, analyzed potential environmental impacts of the 6th Cycle Housing Element including Program 3.9(A). RECOMMENDATION Staff recommends that the Policy & Services Committee discuss policy options and recommend which, if any, incentives to refine and elevate for City Council consideration. EXECUTIVE SUMMARY This report summarizes a variety of approaches the City might use in order to make the development of new multi-family residential more desirable in certain areas of the City where both commercial and residential development are allowed, consistent with Housing Element Program 3.9(A) and 2025 Council Priority No. 52. This report also provides options which are less likely to spur residential benefits, but which could result in additional benefits to the City when commercial projects are authorized. The City is seeking to make progress towards permitting the 6,086 dwelling units assigned to the City as part of the Sixth Cycle Housing Element Regional Housing Needs Assessment (RHNA), as well as respond to its jobs/housing imbalance, in part by incentivizing residential and mixed- use development projects where appropriate. At the time of this report, the City has permitted 635 new units, and the 2023-2031 Housing Element identifies a ratio of 3.19 jobs to employed residents within the City. The most recent available data, from 2023, shows a ratio of 4.18 jobs to housing units, significantly higher than the 1.5 regional average. In many areas, including sites near transit, economic pressures and the current regulatory framework result in an imbalance in favor of office and research commercial development. The report commissioned by the City (refer to Attachment A) concludes that there are limited policy tools available to the City to influence the relative feasibility of office development in locations where it currently outperforms residential development. These are: Fees. Increases to development impact fees (e.g., commercial linkage fee) could raise the cost of office development and narrow the gap between office and residential development potential. Taxes. A construction tax is a one-time tax levied on new construction, typically based on square footage or project value, which local governments may impose on specific development types. A high construction tax could add to office development project costs. A tax on office development would require voter approval. Building Standards. Elevated building standards for office development, including enhanced sustainability performance, higher energy requirements, labor requirements or other obligations that increase construction cost, could marginally decrease office feasibility. Land Use Regulation. The City could change zoning regulations or otherwise further restrict office development allowances. These changes could be limited to areas of the City where the office market is strongest, such as Downtown, California Ave or the Research Park. BACKGROUND to a strong preference by developers to pursue office uses, which are frequently seen as more profitable. Prior to the Sixth Cycle, the City adopted a Housing Incentive Program (HIP) to increase allowed housing density and relax standards (expanded in 2025), and also instituted an Office/R&D Development Cap as tools working in unison to incentivize housing. However, the 2023-2301 Housing Element identified that additional regulatory may be needed. ANALYSIS Market fundamentals strongly favor office development in core locations. Office development outperforms multi-family housing (rental units even more so than for-sale units) in the locations where Palo Alto achieves its highest office values, particularly Downtown and segments of California Avenue. Achievable office rents in these areas support land values that exceed rental housing values by a wide margin. This performance gap reflects underlying market conditions rather than policy choices. Modest policy interventions that add cost to office development are unlikely to change these outcomes because office uses are significantly more valuable. Existing zoning limits office development potential. Although office typically outperforms housing in terms of value per square foot, office uses are already meaningfully constrained through density (i.e., Floor Area Ratio) limits. Across the four study sites, allowable office density is far lower than allowable residential density. In some cases, office development capacity is half of residential capacity and in one case it is approximately one quarter. These project size constraints already significantly reduce office-supported land value and are a disincentive for office development. Cost-based City disincentives would need to be significant to change highest-and-best use outcomes in desirable office locations. For the two test sites where office is more desirable than housing, reducing the appeal of office development by adding cost would require very large levies. To make housing preferable, one site would require approximately double its current commercial linkage fee burden, while another would require that fees increase by nearly an order of magnitude (1,000%). These magnitudes are well beyond typical policy adjustments and indicate that fee-based tools alone likely cannot equalize office and residential feasibility in some Palo Alto locations. 4.Low-density for-sale residential prototypes perform relatively well under current market conditions. For-sale housing is highly competitive with office outside Palo Alto’s best office locations. The study finds that townhome format residential development is preferrable to office development at two sites, where for-sale pricing supports stronger residual values1 than office. Townhomes are the highest and best uses at these sites without additional incentives, reflecting strong demand for lower density ownership housing. This finding suggests that lower density for-sale housing can stimulate redevelopment, particularly in locations where office is less prevalent. 5.Rental housing faces feasibility challenges in today’s market. Rental residential prototypes underperform both office and for-sale housing across the study sites. While the City is seeing a number of for-rent residential and mixed-use residential applications, particularly projects utilizing State Density Bonus Law or the City’s Housing Incentive Program in corridors such as San Antonio Road and El Camino Real, these projects often rely on regulatory incentives and increased density to move forward. High construction costs, on-site inclusionary housing requirements in the Housing Focus Area, and tepid regional rent growth all contribute to lower residual land values. Even in the best locations, rental housing feasibility lags office by a substantial margin and trails for- sale housing as well. This suggests that current development activity is largely incentive- driven rather than market-driven, and that additional incentive tools are likely needed to achieve meaningful production of new multifamily rental units in the near term. 6.Redevelopment incentives in Palo Alto should reflect the notable differences in development feasibility findings across the City’s distinct submarkets. In the best office locations, market conditions favor office so strongly that strict limitations on office development would likely be needed to prioritize housing development. Meanwhile, in less desirable office locations, lower-density for-sale housing, particularly townhomes, appear to be the most effective land use to catalyze redevelopment. The study also finds that rental housing will require additional support to compete with higher-value alternatives. Based on the findings summarized above, the following sections explore the four primary policy tools available to the City which could influence the relative feasibility of office development in locations where it currently outperforms residential development. Staff is seeking the Committee’s feedback on these tools to inform the next steps for implementing Housing Element Program 3.9(A). 1 Estimated completed project value minus the total development cost. Potential Policy Tool 1: Fees The City could choose to increase development impact fees (e.g., commercial linkage fee), which are paid by commercial development projects and are used to mitigate the impacts of an increase in housing demand from employee households that require below-market-rate housing. Revenues from linkage fees are deposited into a housing trust fund for the construction of affordable housing within the City. Under the California Mitigation Fee Act (Gov. Code §§ 66000-66025), all development impact fees are required to be based on projected impacts of the development. In addition, most cities choose to adopt fees lower than they are able to based on impacts in order to make desired projects more feasible. In 2015, Strategic Economics and Vernazza Wolfe Associates completed a nexus study for the City which established maximum commercial linkage fees for office/R&D ($264/square feet) and hotel ($177/square feet) uses. The City adopted a commercial linkage fee of $39.70 following the nexus study, and increased the fee to $68.50 in 2021. The current fee is still considerably below the level established by the nexus study. The City is currently working with a consultant team from Keyser Marston & Associates to develop a new non-residential affordable housing nexus study. This study will summarize the methodology, analysis and maximum legally supportable affordable housing impact fees for the following non-residential land uses: retail, office, industrial, warehouse, lodging and research and development. Council is expected to review the draft study no later than September 2026 and to adopt any updated impact fees by January 2027. It is unclear whether an increased non-residential affordable housing impact fee alone would be enough to persuade developers to pursue residential developments, but it could in some cases close the gap in land value between project types, as well as generating additional revenue to the City for affordable housing developments at other sites. The City may also consider adopting different non-residential affordable housing impact fees for different areas in the City as long as none of the fees exceed the maximum legally supportable amount determined by the nexus study. Higher fees could be used to dissuade nonresidential development in certain parts of the city. A high construction tax represents a potential approach to increase office development project costs, making alternative uses more competitive. Like development fee increases, a tax increase could in some cases close the gap in land value between project types, as well as generating additional revenue to the City for affordable housing developments at other sites. No nexus study is required for a tax increase, however, a tax on office development would need to be voter approved. Potential Policy Tool 3: Building Standards Elevated building standards for office development, including enhanced sustainability performance, higher energy requirements, labor requirements or other obligations that increase construction cost could marginally decrease office feasibility. Such standards could include requiring that commercial development projects obtain LEED Platinum certification and Energy Star certifications; institute travel demand management plans to ensure no or a low number of new trips; hire skilled/trained labor for construction; provide increased community benefit obligations; or others. As mentioned above, it is unclear whether such requirements alone would incentivize residential development over commercial development, but at a minimum they would procure community benefits including advancement to the City’s sustainability goals and creation of higher wage jobs. The City could change zoning or otherwise further restrict office development allowances beyond the already limited floor area ratios and square footage caps in place, including removing office as an allowed use entirely. Land use regulation could be targeted for districts of the City where the office market is strongest, such as Downtown, California Avenue, El Camino Real corridor, and the Stanford Research Park. This is likely to have limited impacts, as the City already heavily restricts new office development both on a per-site basis and through the City’s overall office cap (both total office space and net new office space per year). Eliminating office as an allowed use could also have the unintended effect of disincentivizing redevelopment as property owners could seek to retain a high-value non-conforming use. While none of these options alone appear to be sufficient to swing the economic advantage away from commercial development towards residential development, a combination of these options could have some impact, and at the very least provide some advancement towards ancillary City goals. It should be noted, however, that outside of the key office corridors, some types of multi-family residential projects are already preferrable to office development (refer to Attachment A), therefore whichever policy the City follows should be carefully crafted not to disincentivize residential projects, which may rely on commercial development to make projects feasible. Moreover, disincentivizing commercial office does not necessarily translate into increased housing production. Some property owners may hold on to existing assets until there is a more favorable development environment. Receiving this report has no fiscal or resource impacts. This project was funded by a task order not to exceed $114,993 in consulting fees (for both Program 3.9(A) and Program 3.9(B)) as well as staff time. As of January 21, 2025, $73,848 of that task order had been spent. The creation of alternatives for City Council approval (based on this Policy & Services Committee’s recommendations) is within scope of the original contract and will not incur additional consultant fees beyond what has previously been allocated. However, any additional study would likely require new funding. Adoption of some of these policies could result in changes to revenue, such as increases to the City’s affordable housing funds, depending on the mechanisms and policies that City Council ultimately chooses to pursue. STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: Memorandum To: , Lexington Planning lsch, and Kaavya Chhatrapati; -Use Development; 241108 12, 2026 The City of Palo Alto retained Economic and Planning Systems (EPS) to evaluate the financial feasibility of real estate development prototypes across four distinct districts within the city. The City is considering how zoning, development standards, and policy tools influence the relative economics of office and residential development, particularly in geographies that may be candidates for reinvestment over the long term. This memorandum describes a planning-level feasibility assessment of conceptual development project programs prepared by the Lexington Planning consultant team (Lexington Planning, Raimi + Associates, and EPS) and applies revenue and cost assumptions to understand the economic conditions under which redevelopment is likely to occur. The purpose of the analysis is to clarify how current market forces and regulatory frameworks shape redevelopment potential, and to provide a fact-based foundation for discussions about potential policy options for the City to consider. Palo Alto contains submarkets with significantly different real estate values, development capacity, parcel characteristics, and access to transit and amenities. These differences produce distinct feasibility outcomes, and the City is seeking to understand which prototypical developments are most viable in each setting, whether there are structural barriers to desired development patterns, and how policy adjustments may affect feasibility. This memorandum evaluates scenarios that reflect realistic development projects under existing zoning. The analysis focuses on the land uses that are most likely to drive redevelopment: office, rental housing, and for-sale housing. Retail and cultural uses are not evaluated as standalone prototypes. These uses may be accommodated on ground floors or integrated into larger projects, but they do not materially shape the core feasibility questions addressed here. Page 2 The results of this study are intended to inform several policy conversations. First, the City is exploring how to encourage housing production in areas where office demand has historically been strong. Second, the City is evaluating whether fee adjustments or zoning changes can meaningfully shift development outcomes. Third, the City aims to understand how redevelopment potential varies across submarkets so that planning and land use strategies can be tailored to the conditions present in each district rather than applied uniformly. The analysis uses a stabilized year pro forma framework that compares the value of a completed project at full occupancy with the full cost of development. This method does not attempt to predict timing, absorption, or the probability that any specific parcel will redevelop. Instead, it identifies the conditions under which redevelopment becomes financially viable and highlights the relative strength of office and residential prototypes under current market conditions. The analysis incorporates sensitivity testing to evaluate how changes in rent, fees, land cost, and parking format influence feasibility. This provides a broad view of how market and policy factors interact and which levers have meaningful influence on outcomes. Key Findings 1. Market fundamentals strongly favor office development in core locations. Office development outperforms rental housing in the locations where Palo Alto achieves its highest office values, particularly Downtown and segments of California Avenue. Achievable office rents in these areas support land values that exceed rental housing values by a wide margin. This performance gap reflects underlying market conditions rather than policy choices. Modest policy interventions that add cost to office development are unlikely to change these outcomes because office uses are significantly more valuable. 2. Existing zoning limits office development potential. Although office typically outperforms housing in terms of value per square foot, office uses are already meaningfully constrained through density (i.e., Floor Area Ratio) limits. Across the four study sites, allowable office density is far lower than allowable residential density. In some cases, office development capacity is half of residential capacity and in one case it is approximately one quarter. These project size constraints significantly reduce office-supported land value and are a disincentive for office development. 3. Cost-based City disincentives would need to be significant to change highest-and-best use outcomes in desirable office locations. For two sites tested where office is more desirable than housing, reducing the appeal of office development by adding cost would require very large levies. To make housing preferable, one site would require approximately double its current commercial linkage fee burden, while another would require that fees increase by nearly an order of magnitude (1,000%). These magnitudes are well beyond typical policy Economic & Planning Systems, Inc. Page 3 adjustments and indicate that fee-based tools alone likely cannot equalize office and residential feasibility in some Palo Alto locations. 4. Low-density for-sale residential prototypes perform relatively well under current market conditions. In fact, for-sale housing is highly competitive with office outside Palo Alto’s best office locations. The study finds that townhome format residential development is preferrable to office development at two sites, where for-sale pricing supports stronger residual values than office. Townhomes are the highest and best uses at these sites without additional incentives, reflecting strong demand for lower density ownership housing. This finding suggests that lower density for-sale housing can stimulate redevelopment, particularly in locations where office is less prevalent. 5. Rental housing faces feasibility challenges in today’s market. Rental residential prototypes underperform both office and for-sale housing across the study sites. While the City is seeing a number of for-rent residential and mixed-use residential applications, particularly projects utilizing State Density Bonus Law or the City’s Housing Incentive Program in corridors such as San Antonio Road and El Camino Real, these projects often rely on regulatory incentives and increased density to move forward. High construction costs, on-site inclusionary housing requirements in the Housing Focus Area, and tepid regional rent growth all contribute to lower residual land values. Even in the best locations, rental housing feasibility lags office by a substantial margin and trails for-sale housing as well. This suggests that current development activity is largely incentive-driven rather than market-driven, and that additional incentive tools are likely needed to achieve meaningful production of new multifamily rental units in the near term. 6. Redevelopment incentives in Palo Alto should reflect the notable differences in development feasibility findings across the city’s distinct submarkets. In the best office locations, market conditions favor office so strongly that strict limitations on office development would likely be needed to prioritize housing development. Meanwhile, in less desirable office locations, lower-density for-sale housing, particularly townhomes, appear to be the most effective land use to catalyze redevelopment. The study also finds that rental housing will require additional support to compete with higher-value alternatives. Page 4 Development Sites and Submarket Context The feasibility analysis evaluates redevelopment potential across four sites selected to capture the range of market conditions present in Palo Alto. Figure 1 illustrates that the studied locations span transit-served mixed-use districts, commercial corridors, and lower-intensity suburban environments. Table 1 summarizes the submarket context for each site, illustrating how development economics vary across the city’s major employment and housing submarkets. Site 1 - Mayfield (Test Site: 123 Sherman Avenue) Mayfield sits immediately adjacent to the California Avenue Caltrain Station and benefits from a walkable environment with access to neighborhood retail, transit, and proximity to Stanford Research Park. The area functions as a transitional zone between established residential neighborhoods and a major employment district. Office market performance in Mayfield falls between the premium conditions observed Downtown and those seen in Research Park. Site 2 - Research Park (Test Site: 901 South California Avenue) Research Park is characterized by a stable daytime population, a strong concentration of professional services tenants, and, at this site, proximity to an established neighborhood shopping street with high foot traffic (California Avenue). Residential demand is robust in this area due to its transit accessibility, centralized location, and proximity to Stanford. This submarket represents a balanced environment where both residential and office uses may be financially viable depending on site characteristics and zoning. Site 3 - Downtown (Test Site: 901 High Street) Downtown Palo Alto represents the city’s most valuable commercial district. Premium office rents, strong retail foot traffic, a dense mix of uses, and direct Caltrain access create exceptional market value. This location consistently attracts tenants with high willingness to pay, supporting land values far above those of other Palo Alto submarkets. Residential demand is also strong downtown, but housing values are relatively less than those generated by the office market, and limited opportunities for larger buildings contribute to the challenge of building residential projects. Site 4 - Bayshore (Test Site: 2850 West Bayshore Road) The Bayshore functions as a lower density district of Palo Alto with good automobile access, limited walkability, and materially lower rent levels than other Palo Alto submarkets. For-sale housing performs well here, although overall development feasibility remains highly sensitive to cost. The test site provides an office market counterpoint to the premium conditions seen downtown and illustrates how office development potential is limited outside of well-amenitized office clusters. Economic & Planning Systems, Inc. Page 5 Figure 1 – Mapping Development Test Sites Page 6 Table 1 – Submarket Summary Office Market Geography and Value Patterns Office values in Palo Alto are highly location-specific and follow a recognizable spatial hierarchy. As illustrated in Figure 2, higher office rents and sale prices are concentrated along a series of linear commercial corridors, including University Avenue, El Camino Real, California Avenue, and Page Mill Road. These corridors align with transit access, walkable amenities, and concentrations of professional services tenants. They represent locations where firms demonstrate the highest willingness to pay for visibility, proximity to peers, and regional accessibility. The highest value areas occur where these corridors overlap, forming premium office zones near the Downtown Caltrain Station and the California Avenue commercial district, consistent with the sales data shown in Table 2. Properties within these commercial nodes regularly achieve sale prices exceeding $1,600 per square foot. Meanwhile, values fall sharply even a few blocks outside these boundaries, reflecting the importance of access, amenities, walkability, and tenant clustering in the Palo Alto market. This corridor-based value geography helps inform and explain the financial feasibility results of this analysis. Office development exhibits strong performance Downtown and near California Avenue because these locations achieve substantial market premiums that offset density limitations and high construction costs. Outside these zones, office development feasibility is significantly weaker, as is found at the Bayshore site. In those Site #Address Submarket Context and Key Characteristics Economic & Planning Systems, Inc. Page 7 areas, this analysis finds that achievable rents do not justify new Class A office construction even under favorable cost assumptions. The spatial market dynamics observed in Palo Alto directly affect land values. Office development potential aligns closely with the corridor zones. These higher value locations support office development even at constrained densities, while lower value office locations are more competitive for residential, though rental housing appears largely infeasible under current market conditions and development policies. Figure 2 - Office Market Premium Corridors Page 8 Table 2 - Office Sale Prices in Palo Alto Site #Address Sale Price Per Square Foot1 Sale Year1 1 206 California Ave $812 2024 2 3401 El Camino Real $1,600 2024 3 540 University Ave $828 2024 5 250 University Ave $1,969 2025 6 490 California Ave $516 2025 7 3950 Fabian Way $572 2025 8 1870 Embarcadero Rd $202 2025 9 3176 Porter Dr $578 2024 10 2882 Sand Hill Rd $1,632 2024 [1] CoStar Group Data; Sales Post 2024 Economic & Planning Systems, Inc. Page 9 Prototype Development Approach Raimi + Associates (R+A) prepared zoning-compliant development prototypes for each study test site to establish realistic site yield estimates for feasibility testing. As summarized in Table 3 and Table 4, the study approach relied on a detailed review of allowable floor area, height limits, open space requirements, and parking ratios across the relevant zoning districts. The resulting real estate development “prototypes” reflect the scale, massing, and construction types that a developer could realistically pursue under current City regulations. For residential prototypes, R+A developed a range of building forms appropriate to each submarket, including ownership townhomes, mid-rise multifamily projects with parking podiums, and for-sale condominiums. Table 3 presents the residential program developed for each test site. The development programs incorporate typical dwelling unit characteristics, efficiency assumptions, amenity programs, and parking configurations consistent with development norms for the area and the differences between rental and ownership formats. For the office development prototypes, R+A designed low- and mid-rise Type I buildings that match Palo Alto’s limited density allowances. Table 4 outlines the office programs studied, which range from one to three stories depending on zoning. Parking layouts vary by site and include structured parking, integrated garages, and limited surface spaces consistent with site geometry and standards. Construction Types Used in the Prototypes The study’s real estate development prototypes rely on two primary construction types most likely to be feasible for residential and office development in Palo Alto. Type V residential construction is wood frame construction used for townhomes, which follow a lighter structural system and remain within the height and scale typically permitted in neighborhood contexts. Type V construction is also common for the upper stories of rental apartment buildings. In these multifamily prototypes, the residential floors are constructed with wood framing that sits above a concrete parking podium. This configuration is common in midrise residential development because it allows the project to achieve additional stories, with required parking housed in a durable podium level while keeping the upper stories in a more cost- efficient wood frame system. Type I construction is concrete or steel structural construction that provides the strength, fire rating, and structural spans needed for podium levels and for office buildings. In the residential prototypes, Type I construction forms the concrete parking podiums and any associated ground floor spaces that require higher load Page 10 capacity or enhanced fire separation. In the office prototypes, Type I construction is used for the full building structure, which ranges from one to three stories depending on the zoning requirements for each site. This construction type supports larger open floor plates, greater floor to floor heights, and higher occupancy standards than can be accommodated in wood frame structures. The financial feasibility analysis relies on the R+A development programs to establish quantitative inputs to the pro forma model. Key analytical inputs informed by the R+A work include gross and net square footage, unit counts, parking supply, and construction typology. EPS prepared associated revenues and operating costs assumptions. Table 5 provides a consolidated summary of these prototype development programs across the four sites. The prototypes form the foundation for the feasibility testing and sensitivity analysis. Prototypes generally reflect baseline zoning conditions with the exception of the Downtown Scenario, which assumes waivers for FAR and height. These waivers did not materially alter relative feasibility outcomes. The analysis provides a consistent framework for comparing office and residential performance across sites with distinct land use patterns and market conditions. Table 3 - Residential Prototype Programs and Construction Types by Site Economic & Planning Systems, Inc. Page 11 Table 4 - Office Prototype Programs and Construction Types by Site Page 12 Table 5 - Summary of Prototype Development Programs by Site Analytical Approach This analysis applies a stabilized-year pro forma framework to estimate the land value that each prototype can support. The method compares the value of a completed project at stabilization (i.e., full occupancy) with total development cost, expressed in constant 2025 dollars. Stabilized value is derived from assumptions about market-supportable rents or sale prices, operating costs, and capitalization rates. This approach provides an initial indication of feasibility and not to model absorption, phasing, or other time-based cash flows. For each prototype, the analysis calculates a residual land value by subtracting total development cost from the estimated value. The resulting “residual land value” represents the price a project could theoretically pay for land acquisition while still meeting required investment returns. Feasibility is evaluated by comparing the residual land values of office and residential prototypes on the same site, which allows for a direct assessment of which use is more competitive (i.e., “highest and best use”) under current market and cost conditions. Site Site Area (Acres) Prototype Type GSF FAR Units Parking Spaces Parking Ratio Economic & Planning Systems, Inc. Page 13 The analysis tests the residential and office prototypes prepared by R+A for each of the four study sites. Feasibility outcomes reflect assumptions about building size, efficiency, construction type, revenue performance, and parking configuration. Sensitivity tests on rent, fees, density, and parking formats provide additional insight into how market and policy factors influence the relative competitiveness of office and residential development Summary of Key Terms • Market Value – The estimated sale price of a real estate asset under current market conditions, assuming a willing buyer and seller. • Per-NSF Rent and Sale Price Assumptions – Rental rates and sale prices expressed on a per-net-square-foot basis, informed by market data from CoStar, Redfin, Zillow, and comparable high-quality new construction in Palo Alto. • NSF (Net Square Feet) – Interior usable space within a building, excluding common areas, walls, and building service spaces. • Hard Costs – Direct construction costs, including site work, labor, materials, and contractor overhead. • Soft Costs – Indirect development costs such as architecture, engineering, permits, legal fees, financing costs, and other professional services. • Other Costs – Costs not captured in hard or soft costs, including contingency and development cost provisions for unforeseen conditions. • Net Operating Income (NOI) – Annual operating revenue minus operating expenses, excluding debt service, depreciation, and income taxes. • Cap Rate (Capitalization Rate) – The investor’s required stabilized annual return, calculated as net operating income divided by project value. • Development Spread / Yield on Cost Premium – The additional return, expressed in basis points, required to compensate for construction, entitlement, and lease-up risk above the stabilized cap rate. • ROC (Return on Cost) – An unlevered return metric comparing stabilized net operating income to total development cost, commonly used to evaluate development feasibility. • Residual Land Value (RLV) – The difference between capitalized project revenue and total development cost, representing the estimated value available to support land acquisition given the assumed program and financial inputs. Page 14 Key Assumptions Revenue Assumptions Revenue assumptions establish the valuation of each prototype and are central to calculating residual land value. The categories below describe the key components of revenue, including market rents and sale prices, capitalization rates, and investment return expectations. Market Rents and Sale Prices Market rents and sale pricing reflect current achievable levels for newly delivered products in each submarket. The assumptions utilized in this analysis are summarized in Table 6. Rental housing value is calculated using net square-foot monthly rents derived from the observed performance of high-quality Class A buildings based on data from CoStar. Among the test sites, Downtown achieves the highest apartment rents, owing to its walkability, concentration of services, and immediate access to the University Avenue Caltrain station. Rent in the Research Park and Mayfield remain strong but do not reach Downtown levels. In contrast, Bayshore supports more moderate rents, reflecting its relative distance from transit, services, and other neighborhood amenities. For ownership housing, revenues are based on sale prices per net square foot for attached residences built with Type V construction, based on data from Redfin, Zillow, CoStar, and other sources. Townhomes in the Research Park and Bayshore benefit from substantial demand among households seeking ownership opportunities in Palo Alto—one of the region’s most supply-constrained for-sale housing markets. Prices reflect both the strong purchasing power of local households and scarcity of new for-sale home inventory in the city. While townhome prototypes are financially viable under current assumptions, recent zoning amendments have increasingly sought to encourage higher-density forms of ownership housing, such as through raising minimum density requirements and increasing allowable heights and maximum densities. Office rents are based on triple net (NNN) lease structures in which taxes, insurance, and maintenance are paid by the tenant. The strongest office market rents are seen in Downtown. Capitalization Rates Capitalization rates (“cap rates”) are a market factor that inform the relationship between a building’s net operating income and property value. This relationship between property income and value is central to feasibility calculations for income-generating commercial Economic & Planning Systems, Inc. Page 15 properties. Rental housing and office pro formas use cap rates that reflect current investor expectations and the risk profile of each product type to estimate market value. Rental housing analysis assumes a 4.0% cap rate, which is consistent with the long-term stability of multifamily assets in supply constrained cities such as Palo Alto. Multifamily has historically exhibited relatively low volatility due to consistently high demand and the predictability of the income streams. Office analysis assumes a 5.5% cap rate to reflect the greater volatility of the office market and the higher perceived risk associated with tenant rollover (a higher cap rate indicates a greater level of risk), leasing downtime, and changing workplace patterns. Office income is more sensitive to macroeconomic cycles, company expansions and contractions, and location-specific desirability. As a result, investors require a higher yield relative to multifamily. Yield Premiums for New Development The spread between market cap rates for built and stabilized buildings and the developer’s required return yield represents the investment premium necessary to justify the risk associated with new development. This premium compensates the developer for taking on construction risk, entitlement risk, lease-up uncertainty, and broader market fluctuations. In this analysis, both office and rental housing require a single percentage point spread above the market cap rate to justify new development. This means that in a market where stabilized apartment buildings exhibit a 4.0 percent cap rate, developers need to achieve a 5.0 percent yield on cost for the project to be attractive. The same logic applies to office, where the required development yield is 6.5 percent. These investment return thresholds reflect the minimum profitability necessary to attract capital. Return on Cost Expectations for Ownership Housing Unlike rental housing and office, cap rates are not utilized in estimating potential values of for-sale housing. Market value is established through review of market transactions. Residual land values are then estimated by comparing sales revenue with development cost, including a return on cost factor. Townhome prototypes in this analysis require a 15 percent unlevered return on development cost. This threshold is consistent with typical expectations for attached ownership product in high cost, high entitlement complexity jurisdictions. It accounts for construction risk, sales absorption risk, and the absence of recurring income. The 15 percent requirement reflects a typical investment threshold for ownership housing in the Bay Area. Page 16 Table 6 – Revenue Assumption Summary Cost Assumptions Real estate development cost assumptions include hard costs (i.e., direct construction costs), soft costs, and other project costs such as developer return requirements. Construction cost assumptions draw on published Bay Area cost benchmarks, including from Marshall and Swift, as well as EPS experience on comparable development projects. These costs vary by construction type, scale, and prototype. Hard Costs Hard costs include site work and vertical building construction expenses. For residential prototypes, these costs also include required furniture, fixtures, and equipment. Construction types differ across prototypes, ranging from Type V townhomes at lower cost levels to Type I podium and Type I office structures with substantially higher per- square-foot costs. Parking format is a major factor influencing overall construction costs. Podium and subterranean parking involve significantly higher per-space costs than integrated Type V garages or surface parking. Table 7 summarizes cost assumptions for each site. Site Use Avg Unit Size or Office NSF Revenue Assumption Yield / Return Assumption Economic & Planning Systems, Inc. Page 17 Soft Costs Soft costs include design, engineering, entitlement, and administrative costs, as well as estimates for taxes, insurance, and financing. Permit and fee estimates incorporate the City of Palo Alto’s current development impact fees, including the affordable housing impact fee. City staff derived fee estimates based on the R+A development programs using the City’s current fee schedule. The analysis assumes that required below-market-rate units are delivered on-site in both rental and ownership prototypes. Other Project Costs Other project costs include a development contingency allowance that applies to total hard and soft costs, along with the required developer returns. For income-generating uses such as office and rental housing, returns are modeled as a stabilized yield on cost. For ownership housing, the return requirement is modeled as a one-time return on cost at time of sale, reflecting the absence of ongoing operating income. These return expectations reflect typical investor requirements in Bay Area markets. Table 7 – Cost Assumptions Summary Site Use Construction Type Direct Construction Cost1 Parking Format Parking Cost Assumption Page 18 Developer Interviews EPS conducted interviews in November with several development firms active or recently active in Palo Alto, including Sand Hill Property Company (November 11), Sobrato (November 5), and Sares Regis Group (November 13). These discussions were intended to validate the assumptions used in the financial analysis, understand current market conditions from practitioners operating in the city, and gather insight into how developers interpret redevelopment potential under existing zoning and market constraints. Across all interviews, firms stated that the key findings of the financial analysis reasonably reflect current conditions in the Palo Alto market. They noted that revenue assumptions for office, rental housing, and ownership housing align with pricing observed in recent projects, and that construction cost assumptions are generally consistent with recent bids and contracts. The only meaningful point of divergence is related to for-sale townhomes. Multiple firms indicated that townhome sale prices assumed in the analysis may be conservative relative to actual market potential. To maintain a cautious approach appropriate for long-range planning, the analysis retains conservative sale pricing. However, the sensitivity testing discussed below illustrates the effect of stronger pricing on feasibility outcomes. Firms also offered perspective on the policy implications of the feasibility scenarios. In general, interviewees emphasized that Palo Alto’s premier office locations, particularly Downtown, California Avenue, and Research Park, command exceptional rents and maintain strong tenant demand despite limited density allowances. They noted that these districts are prestige office markets with deep regional appeal, which means that the inherent value of office in these locations is not easily diminished through straightforward disincentives such as increased fees, taxes, or regulatory burdens. In their view, efforts to suppress office demand directly are unlikely to shift development patterns in a meaningful way. Interviewees broadly indicated that policies that improve the feasibility of housing would likely be more effective at shifting development outcomes toward housing over other uses. They highlighted several suggestions to make residential projects more competitive relative to office, including lower density allowances that better match demand and construction economics, more predictable entitlement pathways, and adjustments to parking requirements. A notable refrain was the desire for streamlined entitlements and lower minimum density requirements for housing, specifically to allow townhome development. Interviewees also observed that the relative competitiveness of office on the highest-value sites reflects structural market conditions, rather than analytical assumptions. Economic & Planning Systems, Inc. Page 19 Feasibility Findings The feasibility results for the four study test sites show clear patterns in how office, rental housing, and for-sale housing perform under current market conditions and zoning requirements. Test fits represent current zoning, including allowed density increases through the City’s Housing Incentive Program and State Density Bonus Law. Outcomes vary across submarkets, but the key drivers are consistent: achievable rent and sale prices, construction costs, and zoning. The findings below summarize how each prototype performs relative to these factors. Table 8 shows estimated residual land value per acre for office and residential prototypes across the four test sites. Note that the Site 1 scenarios are mixed-use prototypes that include a ground-floor retail component. The residential and office RLV/acre values shown in Table 8 are derived based on the sum of the component pro formas (e.g., residential RLV + retail RLV), translated to a per-acre basis. See proformas in Appendix A for detailed calculations for each use component. Office Development Office results in a positive land value in all four locations and remains the highest and best use in the more desirable commercial locations, Downtown and in Mayfield. Downtown, monthly achievable rents approach $8.50 per net square foot, producing a residual land value of nearly $13.1 million per acre, the highest in the study. Office also outperforms residential at the Mayfield site, with supportable residual land value estimated at $3.6 million per acre. At these sites, the land value gap between office and residential appears to exceed what cost-based policy interventions typically seek to solve. Multifamily Rental Housing Multifamily rental housing is the most challenged of the tested uses and is marginally viable only in the highest-value locations under current market conditions. At Mayfield, the rental prototype appears infeasible, generating negative residual land value due to modest achievable rents and the cost structure of a mid-rise podium building. Among the locations tested, Downtown is the only area where rental housing generates a positive residual land value; however, at approximately $1.9 million per acre, this outcome would require site acquisition costs well below prevailing market levels to achieve near-term feasibility. Taken together, the results indicate that today’s rent levels, combined with podium construction costs and parking obligations, create a substantial near-term feasibility barrier for rental housing across much of the city. Importantly, these findings represent a snapshot in time rather than a long-term constraint on multifamily development. The City currently has a broader development pipeline of over 3,000 multifamily units proposed or entitled, including projects advancing within the Housing Focus Area along El Camino Real, increased zoning capacity in other areas such as San Antonio Road, Page 20 developments such as Fabian Way that are proceeding under base zoning rather than through Builder’s Remedy, and projects leveraging state density bonus incentives. With the exception of a small-scale project of approximately eight units, no multifamily developments are currently under construction in the city as of February 12, 2026. This is consistent with cyclical development patterns in which developers prioritize entitlements during weaker market conditions in order to be positioned to deliver housing once capital markets and rental fundamentals improve. For-Sale Townhomes For-sale townhomes are consistently feasible and, in some cases, outcompete office. At Research Park and Bayshore, townhomes generate residual land values of $10.7 million and $11.4 million per acre, respectively. These figures reflect strong demand for townhome development in Palo Alto. Townhomes are the only residential product that outperforms office, indicating that lower-density ownership housing formats can be the highest and best land use in some locations, absent any additional policy intervention. Downtown For-Sale Multifamily The financial analysis also tested a Downtown condominium concept. Findings from this test suggest that a mid-rise for-sale multifamily project could support $8 million or more in residual land value per acre, outperforming the rental prototype on the same site. The finding indicates that a mid-rise condominium product could be viable Downtown, though the office use still appears preferable. Table 8 – Summary of Feasibility Findings SITE HOUSING TYPE RESIDENTIAL RLV/ ACRE OFFICE TYPE OFFICE RLV/ ACRE [1] Site 1 projects include groundfloor retail. RLV values shown here for Site 1 combine RLV outputs from the primary uses (residential or office) with RLV outputs from their respective retail uses, and converts the sums to a per-acre value. Economic & Planning Systems, Inc. Page 21 Sensitivity Analysis Sensitivity analysis evaluates how key inputs to the financial analysis influence the relative feasibility of office and residential development across the four Palo Alto study test sites. The sensitivity analysis considers the impact of market conditions and potential policy options. Consistent with other study results, residual land value determines which land use is more competitive at each site as key inputs are evaluated. In the tables that accompany this section, grey shading indicates that the residual land value for office falls below the residential alternative, meaning residential becomes the highest and best land use at the test site. The shading allows readers to see where shifts in rent or fee levels meaningfully alter development feasibility outcomes. Commercial Linkage Fee Sensitivity A key policy consideration is whether the City of Palo Alto should add to the cost of office development in an effort to disincentivize that use. This might be done through fees, taxes, or other measures. The analysis considers increases to the City’s commercial linkage fee, though any City-controlled mechanism that adds to the cost of office development without adding to the cost of housing development could serve the same purpose. The analysis tested a wide range of commercial linkage fee levels for each office prototype, including values both below and above the current fee of $80 per square foot. The goal is to understand whether fee adjustments could realistically shift feasibility away from office and toward residential development.1 The results show that marginal changes to fees produce only modest movement in feasibility. Office performance in Palo Alto is shaped primarily by achievable rent and the cost efficiency of low- and mid-rise office formats. At two of the study sites, office is already less competitive than residential, so fee changes have no effect. At the remaining sites where office continues to outperform residential, the fee would need to increase to levels well above normal policy practice before office would no longer be the highest and best use. In Mayfield, the fee would need to approximately double. In Downtown, it would need to increase by almost an order of magnitude (1,000%). These levels may not be realistic from a policy perspective and any changes to development impact fees would need to be evaluated for compliance with applicable state and local laws. 1 Note that while the study contemplates changes to the commercial linkage fee, the sensitivity testing examines fee levels that may not be supportable by “nexus” analysis required to substantiate legal impact fees in California. Page 22 Rent Sensitivity The rent sensitivity analysis tested office rents in increments of 25 cents per square foot. These increments reflect realistic movement within Palo Alto’s office submarkets. Rent changes have a strong influence on feasibility because rent directly influences project value. Importantly, the City has no control over private lease rates, yet shifting rent levels determine whether office development remains viable. In high value locations such as the downtown core, even small rent changes produce visible shifts in competitiveness. In lower value areas such as Bayshore, office rents are likely to remain too low for office to outperform residential. These results highlight that development feasibility is primarily market driven and that policy interventions typically only influence outcomes at the margin. Sensitivity Test Results At Site 1, the residual land value for office is $3.57 million per acre compared with a residual land value of residential estimated at negative $0.58 million per acre, indicating that office development is substantially more feasible under current conditions. Table 9 shows how office rents and the commercial linkage fee would need to shift for office feasibility to fall such that residential becomes the highest and best use. If office rents remain at today’s levels, the commercial linkage fee would need to roughly double for office to underperform residential. If the fee remains unchanged, office rents would need to decline by about fifty cents, to roughly $7 per square foot, for residential development to be a competitive option. Table 9 - Site 1 – Mayfield Residual Land Value (in Millions) Sensitivity: Commercial Linkage Fee and Office Market Rent $3.57 $0 $40 $80 $120 $160 $200 $240 $280 $700 $6.75 $3.04 $0.20 ($2.84)($5.46) ($8.30) ($11.13) ($13.97) ($16.80) ($46.57) $7.00 $5.18 $2.34 ($0.70)($3.33) ($6.16) ($9.00) ($11.83) ($14.67) ($44.43) $7.25 $7.32 $4.48 $1.44 ($1.19) ($4.02) ($6.86) ($9.69) ($12.53) ($42.29) $7.50 $9.45 $6.62 $3.57 $0.95 ($1.88) ($4.72) ($7.55) ($10.39) ($40.16) $7.75 $11.59 $8.76 $5.71 $3.09 $0.25 ($2.58) ($5.42) ($8.25) ($38.02) $8.00 $13.73 $10.90 $7.85 $5.23 $2.39 ($0.44) ($3.28) ($6.11) ($35.88) $8.25 $15.87 $13.03 $9.99 $7.36 $4.53 $1.70 ($1.14) ($3.97) ($33.74) $8.50 $18.01 $15.17 $12.13 $9.50 $6.67 $3.83 $1.00 ($1.84) ($31.60) Commercial Linkage Fee/ SF Rent/SF Economic & Planning Systems, Inc. Page 23 At Site 2, office residual land value is already below residential residual land value. Office is valued at $8.12 million per acre while residential is valued at $10.7 million per acre as shown in Table 10. This outcome reflects the favorable development economics of the townhome prototype, which are more feasible than rental housing in today’s market. It also reflects that Site 2 is not a premium office location and office development density is constrained. Table 10 – Site 2 – Research Park Residual Land Value (in Millions) Sensitivity: Commercial Linkage Fee and Office Market Rent Site 3 is the highest value office project tested by the study. The residual land value for an office project is estimated at $13.3 million per acre, compared with a residential residual land value of $1.86 million per acre, as shown in Table 11. Bringing office land value down to residential rental levels would require nearly a 10-fold increase in fees comparable cost increase achieved through other means. Table 11 – Site 3 – Downtown Residual Land Value (in Millions) Sensitivity: Commercial Linkage Fee and Office Market Rent $8.12 $0 $40 $80 $120 $160 $200 $240 $280 $700 $6.25 $7.45 $6.69 $5.92 $5.15 $4.39 $3.62 $2.86 $2.09 ($5.95) $6.50 $8.19 $7.42 $6.65 $5.89 $5.12 $4.36 $3.59 $2.83 ($5.22) $6.75 $8.92 $8.16 $7.39 $6.62 $5.86 $5.09 $4.33 $3.56 ($4.48) $7.00 $9.66 $8.89 $8.12 $7.36 $6.59 $5.83 $5.06 $4.30 ($3.75) $7.25 $10.39 $9.63 $8.86 $8.09 $7.33 $6.56 $5.80 $5.03 ($3.01) $7.50 $11.13 $10.36 $9.60 $8.83 $8.06 $7.30 $6.53 $5.77 ($2.27) $7.75 $11.86 $11.10 $10.33 $9.56 $8.80 $8.03 $7.27 $6.50 ($1.54) $8.00 $12.60 $11.83 $11.07 $10.30 $9.53 $8.77 $8.00 $7.24 ($0.80) Commercial Linkage Fee/ SF Rent/SF $13.13 $0 $40 $80 $120 $160 $200 $240 $280 $700 $7.75 $12.38 $11.65 $10.92 $10.19 $9.46 $8.73 $8.00 $7.27 ($0.39) $8.00 $13.11 $12.38 $11.66 $10.93 $10.20 $9.47 $8.74 $8.01 $0.35 $8.25 $13.85 $13.12 $12.39 $11.66 $10.94 $10.21 $9.48 $8.75 $1.09 $8.50 $14.59 $13.86 $13.13 $12.40 $11.67 $10.94 $10.21 $9.49 $1.83 $8.75 $15.33 $14.60 $13.87 $13.14 $12.41 $11.68 $10.95 $10.22 $2.56 $9.00 $16.07 $15.34 $14.61 $13.88 $13.15 $12.42 $11.69 $10.96 $3.30 $9.25 $16.81 $16.08 $15.35 $14.62 $13.89 $13.16 $12.43 $11.70 $4.04 $9.50 $17.55 $16.82 $16.09 $15.36 $14.63 $13.90 $13.17 $12.44 $4.78 Rent/SF Commercial Linkage Fee/ SF Page 24 At Site 4, office is found to be less feasible than residential development, as shown in Table 12. Bayshore is the weakest office submarket among the four sites given its location a distance from the city’s strongest office districts. This compares with a residential townhome prototype that performs very well. Across the full range of rent and fee combinations tested in the sensitivity analysis, office never outperforms residential, and there is no sensitivity scenario evaluated in which office becomes the higher value use. Table 12 - Site 4 – Bayshore Residual Land Value (in Millions) Sensitivity: Commercial Linkage Fee and Office Market Rent $0.75 $0 $40 $80 $120 $160 $200 $240 $280 $700 $3.50 ($0.01) ($0.75)($1.48)($2.21) ($2.94) ($3.67) ($4.40) ($5.13) ($12.82) $3.75 $0.73 ($0.00)($0.74)($1.47) ($2.20) ($2.93) ($3.66) ($4.39) ($12.07) $4.00 $1.47 $0.74 $0.00 ($0.73) ($1.46) ($2.19) ($2.92) ($3.65) ($11.33) $4.25 $2.21 $1.48 $0.75 $0.01 ($0.72) ($1.45) ($2.18) ($2.91) ($10.59) $4.50 $2.95 $2.22 $1.49 $0.75 $0.02 ($0.71) ($1.44) ($2.17) ($9.85) $4.75 $3.69 $2.96 $2.23 $1.50 $0.76 $0.03 ($0.70) ($1.43) ($9.11) $5.00 $4.43 $3.70 $2.97 $2.24 $1.50 $0.77 $0.04 ($0.69) ($8.37) $5.25 $5.17 $4.44 $3.71 $2.98 $2.25 $1.51 $0.78 $0.05 ($7.63) Commercial Linkage Fee/ SF Rent/SF Economic & Planning Systems, Inc. Page 25 Conclusion The feasibility analysis shows that office development in Palo Alto is highly location dependent and that market forces play a large role in shaping development potential, as compared with marginal policy interventions. In the highest value office areas, such as Downtown, offices are likely to continue to outperform both rental and for-sale residential by a wide margin. These districts command strong rents and benefit from inherent locational advantages that fee adjustments or minor regulatory changes cannot meaningfully counteract. The analysis also demonstrates that there are several locations in which residential development is currently more feasible than office, especially when modeled as ownership townhomes. This pattern is most pronounced in mid-value and lower-value office markets such as Bayshore, where ownership housing achieves high residual land values and, in some cases, outperforms offices under current zoning. These findings reveal that ownership-based residential formats represent a viable and competitive development option in many parts of the city. Rental housing faces the greatest feasibility challenges across the study area. Podium construction costs, moderate achievable rents outside Downtown, and inclusionary housing requirements all contribute to estimated residual land values that generally fall below those of office or ownership housing. Any City development incentives or policy options to incentivize housing over office should seek to target unique submarket characteristics in Palo Alto, reflective of the economic conditions present in each area. Most likely, high-value office districts will remain dominated by office unless zoning capacity changes. It is unlikely cost-adding measures can meaningfully shift outcomes in favor of housing. In some areas, it may be that adjusting zoning to reduce minimum density could be a meaningful incentive to promote housing. Page 26 Policy Considerations and Recommendations Policy tools are available if the City wishes to influence the relative feasibility of office development in locations where its use currently outperforms residential. Impact fees, taxes, and building standards are the most likely tools to add cost to office development in an effort to disincentivize it. Zoning changes are also an option to reduce office development. Fees. Increases to development impact fees (e.g., commercial linkage fee), subject to Council approval, could raise the cost of office development and narrow the gap between office and residential development potential. Taxes. A high construction tax represents a potential approach to adding to office development project costs. A tax on office development would need to be voter approved. Building Standards. Elevated building standards for office development, including enhanced sustainability performance, higher energy requirements, labor requirements or other obligations that increase construction cost could marginally decrease office feasibility. Land Use Regulation. The City could change zoning or otherwise further restrict office development allowances, although since most districts already limit commercial densities to relatively low standards there may not be the ability to lower them further (most districts only allow 0.4 FAR of commercial). In areas with higher allowances, some additional reduction in office density may discourage development (zones with 1.0-2.0 FAR zones often require ground-floor retail). These and other related policy approaches would reduce office feasibility. However, such tools are likely most effective in marginal office locations where residual land value is near residential levels. In the highest-value districts such as Downtown, even aggressive fees or cost-increasing requirements may not be sufficient to overcome strong market fundamentals. Developer interviews also emphasized that while disincentives can shift outcomes at the margin, the City would be better served focusing on incentives for residential development. Streamlined approvals that reduce project risk, lower minimum densities that promote townhomes, and flexibility around parking site planning may ultimately have a greater impact on housing production. A balance between incentives and disincentives will be essential to ensuring that policy interventions align with both market realities and the City’s long-term land use goals. Appendix A. Office and Residential Development Proformas by Site Site 1: Mayfield Use: Mid-Rise Market Rate Residential Rental DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Development Site (Square Feet)34,286 Dwelling Units 102 DU / Acre 80 Gross Building Area (Square Feet)1,052 GBA / DU 84,149 Net Rentable Square Feet 79%Efficiency Factor 66,721 Total Parking Spaces 1.1 Spaces / DU 90 Podium Parking Spaces 100%of total parking 90 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Gross Potential Rent $5.50 per SF/Month $52 $4,403,586 Gross Potential Parking Income $0.00 per Space/Month $0 $0 Losses to Vacancy 5.00%of Gross Income -$3 -$220,179 Gross Residential Revenue $50 $4,183,407 Operating Expenses 30%of Gross Revenue -$15 -$1,255,022 Net Operating Income (NOI)$35 $2,928,385 Market Value 4.00%Capitalization Rate $870 $73,209,617 Development Spread 100 Basis Points -$174 -$14,641,923 Supportable Development Value 5.00%Project Yield Rate (on NOI)$696 $58,567,694 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Hard Costs Basic Site Work $20 per SF (Site)$8 $685,720 Building Direct Cost $429 Cost/SF (GBA)$429 $36,099,921 Parking Direct Cost Podium w/ Puzzle System Parking Cost $65,000 per Space $70 $5,850,000 Total Construction Cost $507 $42,635,641 Soft Costs Architecture and Engineering 4.0%of Construction Cost $20 $1,705,426 Other Soft Costs 2.0%of Construction Cost $10 $852,713 Permits and Fees 2.0%of Construction Cost $10 $852,713 Development Impact Fees $39,794 per DU $38 $3,183,535 Public Art In-Lieu Fee 1.0%of Construction Cost $4,737 $426,356 Housing Impact Fee $26 per SF $21 $1,734,746 Taxes and Insurance 2.0%of Construction Cost $10 $852,713 Financing 7.0%of Construction Cost $35 $2,984,495 Marketing/Leasing 2.0%of Construction Cost $10 $852,713 Developer Fee 4.0%of Construction Cost $20 $1,705,426 Total Soft Costs 35.5%$180 $15,150,835 Other Project Costs Development Contingency 5.0%of Construction & Soft Costs $34 $2,889,324 Total Project Cost $721 $60,675,800 Residual Land Value -$2,108,106 per net acre -$2,678,327 Site 1: Mayfield Use: Ground-Floor Retail (component of Residential Scenario) DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Gross Building Area (Square Feet)4,593 Rentable Building Area (Square Feet)100%of GBA 4,593 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Gross Potential Rent $4.81 per SF/Month (NNN)$58 $265,016 Losses to Vacancy 5.00%of GPR -$3 -$13,251 Gross Office Revenue $55 $251,765 Operating Expenses 3%of Gross Revenue -$2 -$7,553 Net Operating Income $53 $244,212 Market Value 4.00%Capitalization Rate $1,329 $6,105,308 Development Spread 100 Basis Points -$266 -$1,221,062 Supportable Development Value 5.00%Project Yield Rate (on NOI)$1,063 $4,884,247 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Hard Costs Building Direct Cost $505 Cost/SF (GBA)$505 $2,319,465 Tenant Improvement Cost $0 Cost/SF (RBA)$0 $0 Total Construction Cost $505 $2,319,465 Soft Costs Architecture and Engineering 4.0%of Construction Cost $20 $92,779 Other Soft Costs 2.0%of Construction Cost $10 $46,389 Permits and Fees 2.0%of Construction Cost $10 $46,389 Development Impact Fees*$44 per SF (GBA)$44 $203,204 Public Art In-Lieu Fee 1.0%of Construction Cost $5 $23,195 Taxes and Insurance 2.0%of Construction Cost $10 $46,389 Financing 7.0%of Construction Cost $35 $162,363 Marketing/Leasing 2.0%of Construction Cost $10 $46,389 Developer Fee 4.0%of Construction Cost $20 $92,779 Total Soft Costs 32.8%of Construction Cost $165 $759,876 Other Project Costs Development Contingency 5.0%of Construction & Soft Costs $34 $153,967 Total Project Cost $704 $3,233,308 Residual Land Value $1,650,939 *Impact Fees apportioned to retail use based on retail's percent of total scenario's square footage. Site 1: Mayfield Use: Class A Office DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Net Development Site (Square Feet)34,286 FAR 1.4 Gross Building Area (Square Feet)48,400 Rentable Building Area (Square Feet)82%of GBA 39,573 Total Parking Spaces 3.8 per 1,000 SF 149 Structured Parking Spaces 23%of total parking 35 Subterranean Parking Spaces 77%of total parking 114 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Gross Potential Rent $7.50 per SF/Month (NNN)$74 $3,561,532 Gross Potential Parking Income $150 per Space/Month $6 $268,200 Losses to Vacancy 5.00%of GPR -$4 -$191,487 Gross Office Revenue $75 $3,638,245 Operating Expenses 3.00%of Gross Revenue -$2 -$109,147 Net Operating Income $73 $3,529,098 Market Value 5.50%Capitalization Rate $1,326 $64,165,416 Development Spread 100 Basis Points -$204 -$9,871,602 Supportable Development Value 6.50%Project Yield Rate (on NOI)$1,122 $54,293,814 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Hard Costs Basic Site Work $20 Cost/SF (Site)$14 $685,720 Building Direct Cost $505 Cost/SF (GBA)$505 $24,441,756 Tenant Improvement Cost $0 Cost/SF (RBA)$0 $0 Parking Direct Cost Podium Parking Cost $50,000 per Space $36 $1,750,000 Subterranean Parking Cost $85,000 per Space $200 $9,690,000 Total Construction Cost $756 $36,567,476 Soft Costs Architecture and Engineering 4.0%of Construction Cost $30 $1,462,699 Other Soft Costs 2.0%of Construction Cost $15 $731,350 Permits and Fees 2.0%of Construction Cost $15 $731,350 Development Impact Fees $83 per SF (GBA)$83 $4,015,613 Public Art In-Lieu Fee 1.0%of Construction Cost $8 $365,675 Taxes and Insurance 2.0%of Construction Cost $15 $731,350 Financing 7.0%of Construction Cost $53 $2,559,723 Marketing/Leasing 2.0%of Construction Cost $15 $731,350 Developer Fee 4.0%of Construction Cost $30 $1,462,699 Total Soft Costs 35.0%of Construction Cost $264 $12,791,807 Other Project Costs Development Contingency 5.0%of Construction & Soft Costs $51 $2,467,964 Total Project Cost $1,071 $51,827,247 Residual Land Value $2,466,566 per net acre $3,133,746 Site 1: Mayfield Use: Ground-Floor Retail (component of Office Scenario) DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Gross Building Area (Square Feet)4,728 Rentable Building Area (Square Feet)100%of GBA 4,728 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Gross Potential Rent $4.81 per SF/Month (NNN)$58 $272,806 Losses to Vacancy 5.00%of GPR -$3 -$13,640 Gross Office Revenue $55 $259,165 Operating Expenses 3%of Gross Revenue -$2 -$7,775 Net Operating Income $53 $251,390 Market Value 5.50%Capitalization Rate $967 $4,570,734 Development Spread 100 Basis Points -$149 -$703,190 Supportable Development Value 6.50%Project Yield Rate (on NOI)$818 $3,867,544 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Construction Costs Building Direct Cost $505 Cost/SF (GBA)$505 $2,387,640 Tenant Improvement Cost $0 Cost/SF (RBA)$0 $0 Total Construction Cost $505 $2,387,640 Soft Costs Architecture and Engineering 4.0%of Construction Cost $20 $95,506 Other Soft Costs 2.0%of Construction Cost $10 $47,753 Permits and Fees 2.0%of Construction Cost $10 $47,753 Development Impact Fees*$83 per SF (GBA)$83 $392,273 Public Art In-Lieu Fee 1.0%of Construction Cost $5 $23,876 Taxes and Insurance 2.0%of Construction Cost $10 $47,753 Financing 7.0%of Construction Cost $35 $167,135 Marketing/Leasing 2.0%of Construction Cost $10 $47,753 Developer Fee 4.0%of Construction Cost $20 $95,506 Total Soft Costs 40.4%of Construction Cost $204 $965,306 Other Project Costs Development Contingency 5.0%of Construction & Soft Costs $35 $167,647 Total Project Cost $745 $3,520,594 Residual Land Value $346,950 *Impact Fees apportioned to retail use based on retail's percent of total scenario's square footage. Site 2: Research Park Use: Townhouse Ownership Residential DEVELOPMENT PROGRAM ASSUMPTIO ASSUMPTION/FACTOR Development Site (Square Feet)138,956 Dwelling Units 21 DU / Acre 68 Market Rate Units 58 Affordable Units 10 Gross Building Area (Square Feet)2,128 GBA / DU 144,720 Net Saleable Square Feet 75%Efficiency Factor 108,624 Market Rate NSF 92,650 Affordable NSF 15,974 Total Parking Spaces 2.0 Spaces / DU 136 Integrated Garage Parking Spaces 100%of total parking 136 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Sale Value Market Rate Sale Value $1,100 per NSF $704 $101,914,871 Affordable Sale Value $678,152 per DU $47 $6,781,518 Overall Sale Value $751 $108,696,388 Sale Cost 5.00%of Sale Value -$38 -$5,434,819 Net Building Value $103,261,569 Supportable Development Value 15.00%Return on Cost (Unlevered)$620 $89,792,669 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Hard Costs Basic Site Work $20 per SF (Site)$19 $2,779,120 Building Direct Cost $320 Total Construction Cost $273 $39,442,800 Soft Costs Total Soft Costs 34.1%$93 $13,443,578 Other Project Costs Total Project Cost $384 $55,530,697 Residual Land Value $34,261,971 per net acre $10,740,461 a separate hard cost line item. Site 2: Research Park Use: Class A Office DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Net Development Site (Square Feet)138,956 FAR 0.4 Gross Building Area (Square Feet)58,164 Rentable Building Area (Square Feet)95%of GBA 55,141 Total Parking Spaces 3.4 per 1,000 SF 185 Surface Parking Spaces 100%of total parking 185 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Gross Potential Rent $7.00 per SF/Month (NNN)$80 $4,631,844 Gross Potential Parking Income $150 per Space/Month $6 $333,000 Losses to Vacancy 5.00%of GPR -$4 -$248,242 Gross Office Revenue $81 $4,716,602 Operating Expenses 3.00%of Gross Revenue -$2 -$141,498 Net Operating Income $79 $4,575,104 Market Value 5.50%Capitalization Rate $1,430 $83,183,704 Development Spread 100 Basis Points -$220 -$12,797,493 Supportable Development Value 6.50%Project Yield Rate (on NOI)$1,210 $70,386,211 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Construction Costs Basic Site Work $20 Cost/SF (Site)$48 $2,779,120 Building Direct Cost $459 Cost/SF (GBA)$459 $26,697,276 Tenant Improvement Cost $0 Cost/SF (RBA)$0 $0 Parking Direct Cost Surface Parking Cost $5,000 per Space $16 $925,000 Total Construction Cost $523 $30,401,396 Soft Costs Architecture and Engineering 4.0%of Construction Cost $21 $1,216,056 Other Soft Costs 2.0%of Construction Cost $10 $608,028 Permits and Fees 2.0%of Construction Cost $10 $608,028 Development Impact Fees $80 per SF (GBA)$80 $4,653,120 Public Art In-Lieu Fee 1.0%of Construction Cost $5 $304,014 Taxes and Insurance 2.0%of Construction Cost $10 $608,028 Financing 7.0%of Construction Cost $37 $2,128,098 Marketing/Leasing 2.0%of Construction Cost $10 $608,028 Developer Fee 4.0%of Construction Cost $21 $1,216,056 Total Soft Costs 39.3%of Construction Cost $205 $11,949,455 Other Project Costs Development Contingency 5.0%of Construction & Soft Costs $36 $2,117,543 Total Project Cost $765 $44,468,394 Residual Land Value $25,917,818 per net acre $8,124,731 Site 3: Downtown Use: Mid-Rise Market Rate Residential Rental DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Development Site (Square Feet)21,529 Dwelling Units 67 DU / Acre 33 Market Rate Units 30 Affordable Units 10%Percent Affordable 3 Gross Building Area (Square Feet)1,130 GBA / DU 37,295 Net Rentable Square Feet 74%Efficiency Factor 27,769 Market Rate NSF 25,245 Affordable NSF 2,524 Total Parking Spaces 0.4 Spaces / DU 14 Surface Parking Spaces 71%of total parking 10 Integrated Garage Parking Spaces 29%of total parking 4 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Gross Potential Rent Market Rate Rent $6.25 per SF/Month $51 $1,893,341 Affordable Rent $1,941 per DU $0 $5,823 Gross Potential Rent $51 $1,899,164 Gross Potential Parking Income $0.00 per Space/Month $0 $0 Losses to Vacancy (Market Only)5.00%of Gross Income -$3 -$94,667 Gross Residential Revenue $48 $1,804,497 Operating Expenses -$18,933 per DU -$17 -$624,803 Net Operating Income (NOI)$32 $1,179,694 Market Value 4.00%Capitalization Rate $983,079 $29,492,359 Development Spread 100 Basis Points -$196,616 -$5,898,472 Supportable Development Value 5.00%Project Yield Rate (on NOI)$786,463 $23,593,887 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Hard Costs Basic Site Work $20 per SF (Site)$12 $430,580 Building Direct Cost $423 Cost/SF (GBA)$423 $15,775,785 Parking Direct Cost Surface Parking Cost $5,000 per Space $1 $50,000 Integrated Garage Cost $14,000 per Space $4 $140,000 Total Construction Cost $440 $16,396,365 Soft Costs Architecture and Engineering 4.0%of Construction Cost $18 $655,855 Other Soft Costs 2.0%of Construction Cost $9 $327,927 Permits and Fees 2.0%of Construction Cost $9 $327,927 Development Impact Fees $36,273 per DU $32 $1,197,019 Public Art In-Lieu Fee 1.0%of Construction Cost $4 $163,964 Housing Impact Fee $26 per SF (Fractional Aff. Unit)$2 $65,636 Taxes and Insurance 2.0%of Construction Cost $9 $327,927 Financing 7.0%of Construction Cost $31 $1,147,746 Marketing/Leasing 2.0%of Construction Cost $9 $327,927 Developer Fee 4.0%of Construction Cost $18 $655,855 Total Soft Costs 31.7%$139 $5,197,782 Other Project Costs Development Contingency 5.0%of Construction & Soft Costs $29 $1,079,707 Total Project Cost $608 $22,673,854 Residual Land Value $920,033 per net acre $1,861,519 Site 3: Downtown Use: Class A Office DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Net Development Site (Square Feet)21,529 FAR 0.4 Gross Building Area (Square Feet)8,584 Rentable Building Area (Square Feet)100%of GBA 8,584 Total Parking Spaces 3.5 per 1,000 SF 26 Surface Parking Spaces 100%of total parking 26 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Gross Potential Rent $8.50 per SF/Month (NNN)$102 $875,568 Gross Potential Parking Income $150 per Space/Month $5 $46,354 Losses to Vacancy 5.00%of GPR -$5 -$46,096 Gross Office Revenue $102 $875,826 Operating Expenses 3.00%of Gross Revenue -$3 -$26,275 Net Operating Income $99 $849,551 Market Value 5.50%Capitalization Rate $1,799 $15,446,377 Development Spread 100 Basis Points -$277 -$2,376,366 Supportable Development Value 6.50%Project Yield Rate (on NOI)$1,523 $13,070,012 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Hard Costs Basic Site Work $20 Cost/SF (Site)$50 $430,580 Building Direct Cost $459 Cost/SF (GBA)$459 $3,940,056 Tenant Improvement Cost $0 Cost/SF (RBA)$0 $0 Parking Direct Cost Surface Parking Cost $5,000 per Space $15 $128,760 Total Construction Cost $524 $4,499,396 Soft Costs Architecture and Engineering 4.0%of Construction Cost $21 $179,976 Other Soft Costs 2.0%of Construction Cost $10 $89,988 Permits and Fees 2.0%of Construction Cost $10 $89,988 Development Impact Fees $80 per SF (GBA)$80 $686,720 Public Art In-Lieu Fee 1.0%of Construction Cost $5 $44,994 Taxes and Insurance 2.0%of Construction Cost $10 $89,988 Financing 7.0%of Construction Cost $37 $314,958 Marketing/Leasing 2.0%of Construction Cost $10 $89,988 Developer Fee 4.0%of Construction Cost $21 $179,976 Total Soft Costs 39.3%of Construction Cost $206 $1,766,575 Other Project Costs Development Contingency 5.0%of Construction & Soft Costs $36 $313,299 Total Project Cost $766 $6,579,270 Residual Land Value $6,490,742 per net acre $13,132,831 Site 4: Bayshore Use: Townhouse Ownership Residential DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Development Site (Square Feet)101,786 Dwelling Units 21 DU / Acre 48 Market Rate Units 41 Affordable Units 7 Gross Building Area (Square Feet)2,201 GBA / DU 105,628 Net Rentable Square Feet 78%Efficiency Factor 81,904 Market Rate NSF 69,960 Affordable NSF 11,944 Total Parking Spaces 2.1 Spaces / DU 100 Surface Parking Spaces 4%of total parking 4 Integrated Garage Parking Spaces 96%of total parking 96 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Sale Value Market Rate Sale Value $1,100 per SF $729 $76,955,633 Affordable Sale Value $803,112 per DU $53 $5,621,783 Overall Sale Value $782 $82,577,417 Sale Cost 5.00%of Sale Value -$39 -$4,128,871 Net Building Value $78,448,546 Supportable Development Value 15.00%Return on Cost (Unlevered)$646 $68,216,127 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Hard Costs Basic Site Work $20 per SF (Site)$19 $2,035,720 Building Direct Cost $320 Total Construction Cost $280 $29,609,000 Soft Costs Total Soft Costs 33.9%$95 $10,039,679 Other Project Costs Total Project Cost $394 $41,631,113 Residual Land Value $26,585,014 per net acre $11,377,235 separate hard cost line item. Site 4: Bayshore Use: Class A Office DEVELOPMENT PROGRAM ASSUMPTIONS ASSUMPTION/FACTOR Net Development Site (Square Feet)101,786 FAR 0.4 Gross Building Area (Square Feet)40,700 Rentable Building Area (Square Feet)100%of GBA 40,700 Total Parking Spaces 3.5 per 1,000 SF 142 Surface Parking Spaces 100%of total parking 142 BUILDING VALUE ASSUMPTION/FACTOR PER GBA TOTAL Gross Potential Rent $4.25 per SF/Month (NNN)$51 $2,075,700 Gross Potential Parking Income $150 per Space/Month $6 $256,410 Losses to Vacancy 5.00%of GPR -$3 -$116,606 Gross Office Revenue $54 $2,215,505 Operating Expenses 3.00%of Gross Revenue -$2 -$66,465 Net Operating Income $53 $2,149,039 Market Value 5.50%Capitalization Rate $960 $39,073,443 Development Spread 100 Basis Points -$148 -$6,011,299 Supportable Development Value 6.50%Project Yield Rate (on NOI)$812 $33,062,144 PROJECT DEVELOPMENT COSTS ASSUMPTION/FACTOR PER GBA TOTAL Hard Costs Basic Site Work $20 Cost/SF (Site)$50 $2,035,720 Building Direct Cost $459 Cost/SF (GBA)$459 $18,681,300 Tenant Improvement Cost $0 Cost/SF (RBA)$0 $0 Parking Direct Cost Surface Parking Cost $5,000 per Space $18 $712,250 Total Construction Cost $527 $21,429,270 Soft Costs Architecture and Engineering 4.0%of Construction Cost $21 $857,171 Other Soft Costs 2.0%of Construction Cost $11 $428,585 Permits and Fees 2.0%of Construction Cost $11 $428,585 Development Impact Fees $80 per SF (GBA)$80 $3,256,000 Public Art In-Lieu Fee 1.0%of Construction Cost $5 $214,293 Taxes and Insurance 2.0%of Construction Cost $11 $428,585 Financing 7.0%of Construction Cost $37 $1,500,049 Marketing/Leasing 2.0%of Construction Cost $11 $428,585 Developer Fee 4.0%of Construction Cost $21 $857,171 Total Soft Costs 39.2%of Construction Cost $206 $8,399,025 Other Project Costs Development Contingency 5.0%of Construction & Soft Costs $37 $1,491,415 Total Project Cost $770 $31,319,710 Residual Land Value $1,742,435 per net acre $745,687 March 10, 2026 www.PaloAlto.gov Multi-Family Development in Mixed-Use Districts Housing Element Program 3.9(A) Presenter: Robert Cain, Principal Planner 2 HOUSING ELEMENT PROGRAM 3.9 Program 3.9 directs the City to implement development standards that: •Incentivize greater housing production •Temper strong market demand for commercial development Program 3.9(A) specifically calls for: •Amending the Municipal Code to reduce commercial floor area allowances or other incentives at strategic locations — shifting the economic benefit of redevelopment toward housing 3 POLICY CONTEXT •Palo Alto’s regional housing needs allocation (RHNA) for the 2023-2031 Housing Element cycle is historically high. •Palo Alto currently has a high jobs/housing imbalance. •Office values in Palo Alto are highly location specific, and, in some locations, office consistently outcompetes housing because it generates higher returns there. •The City is focused on proactive solutions to better align housing needs with job growth. 4 TEST SITES Four distinct submarkets: •Mayfield •Research Park •Downtown •Bayshore Feasibility Analysis: •For each site, both a theoretical residential and commercial project using maximum allowed development was reviewed. •Project value was determined for each project using pro forma analysis. •Consultants confirmed reasonability of general findings through developer interviews. 5 FEASIBILITY FINDINGS Residential development is competitive in some locations but not others: SITE HOUSING TYPE RESIDENTIAL RLV/ ACRE OFFICE TYPE OFFICE RLV/ ACRE Site 1 – Mayfield1 Multifamily Rental -$0.6M 3-Story $3.6M Site 2 – Research Park Townhomes $10.7M 1-Story $8.1M Site 3 – Downtown Multifamily Rental $1.9M 1-Story $13.1M Site 3 – Downtown (Alternative Test)Multifamily Condo $8M +1-Story $13.1M Site 4 – Bayshore Townhomes $11.4M 1-Story $0.7M 6 For locations where office outperforms residential development: •Fees. Increases to development impact fees (e.g., commercial linkage fee). •Taxes. A construction tax focused on office development projects. A tax would require voter approval. •Building Standards. Elevated building standards for office development, including enhanced sustainability performance, higher energy requirements, labor requirements or other obligations that increase construction cost. •Land Use Regulation. Changes to zoning regulations to further restrict office development allowances, potentially limited to areas of the City where the office market is strongest, such as Downtown, California Ave or the Research Park. POLICY OPTIONS 7 NEXT STEPS Staff requests that the Committee identify which policy options, if any, should be refined and elevated for City Council consideration. Depending on the Committee’s feedback, next steps would include: Fees: Incorporated into the ongoing commercial linkage fee nexus study; Council review anticipated by early 2027 Building Standards / Land Use Regulation: Staff would develop ordinance amendments for Planning and Transportation Commission review prior to Council consideration Taxes: Would require further study and voter approval; timing and work effort to be determined ROBERT CAIN Principal Planner Robert.Cain@PaloAlto.gov 650-838-2892