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HomeMy WebLinkAbout2026-06-03 Economic Development Summary MinutesECONOMIC DEVELOPMENT COMMITTEE SUMMARY MINUTES Page 1 of 18 Special Meeting June 03, 2026 The Economic Development Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 5:30 p.m. Present In-Person: Councilmembers Reckdahl (Chair) and Lu, Vice Mayor Stone Absent: None Call to Order Councilmember Reckdahl called the meeting to order. Economic Development Manager Alex Andrade reviewed the agenda and reminded the Committee that the development and business communities were listening. Economic Development Manager Andrade noted that businesses and investors assess risk and value flexibility when entering different business environments, and that tonight’s conversation would hopefully allow for greater flexibility. Public Comments None Action Items 1. Recommendation to the City Council on an Ordinance to Amend Various Sections of Title 16 (Building Regulations) and Title 18 (Zoning) of the Palo Alto Municipal Code to Implement Retail Vitality Policies in the Comprehensive Plan, Including Changes to the Zoning Map for Parcels Zoned CN(GF). CEQA Status: The Ordinance is Consistent with and Represents Implementation of Adopted Policies in the Comprehensive Plan, for Which an Environmental Impact Report (Comprehensive Plan EIR) was Certified on February 5, 2016 Economic Development Manager Alex Andrade presented a slideshow on the retail vitality ordinance. Originally, this item was scheduled for the May 18 City Council agenda; however, the Council did not have time to address it, so it was moved to the Economic Development Committee. This issue was a priority for the Council. Importantly, SUMMARY MINUTES Page 2 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 implementing this ordinance would support an economic development strategy, allowing a wider variety of retail and ground-floor uses to meet market demands. Jean Eisberg, a consultant with Lexington Planning, prepared this draft ordinance and presented it to the Committee. A few years ago, Streetsense and Michael Baker International prepared reports analyzing the retail context and market. During that period, several meetings were held within the Planning and Transportation Commission (PTC) and various ad hoc committees. The Council adopted an interim ordinance in December 2024, which will expire on December 31, 2026. Therefore, it is essential to replace the interim ordinance with a permanent one. The interim ordinance reduced thresholds for waivers and adjustments related to use regulations, modified the definition of formula retail to allow larger enterprises on California Avenue (Cal Ave), and expanded permissible ground- floor uses to include personal services, pet grooming, financial institutions, automobile showrooms, and other retail-like uses. Attachment A included several proposed changes. The permanent ordinance incorporated the regulations from the interim ordinance. The Planning and Transportation Commission (PTC) held a study session on October 29, 2025, and the Retail Committee met in January to discuss this item. The ordinance was revised to incorporate feedback from the PTC and the Retail Committee. The PTC held a hearing on March 25, 2026, and recommended moving the ordinance forward. Staff sought feedback and recommendations from the Economic Development Committee on this ordinance. If the Committee provided a positive recommendation, staff planned to place the ordinance on the Council consent calendar in a couple of weeks. This ordinance would codify the regulations established in the interim ordinance, reduce ground-floor vacancies, and encourage vibrancy throughout the City’s commercial areas. The draft ordinance aimed to allow a broader range of uses, including retail, food and beverage services, retail-like uses, personal services, and other commercial uses, including office uses to an extent. The draft ordinance streamlined processes, removed redundancies and inconsistencies, reduced subjectivity, reinforced zoning district purposes, added standard conditions, and allowed certain uses by right without requiring a conditional use permit (CUP). The draft ordinance proposed 3 classifications for eating and drinking services: full service (table service with wait staff), limited service (quick-service restaurant or café with limited or no seating), and bars without food service. The current code does not permit alcohol service without food service. The draft ordinance proposed standard conditions to address noise, trash, and other disruptions. The draft ordinance in Attachment A included the following changes: • Offices and medical offices: Allow neighborhood-serving offices at the rear of tenant spaces or fronting side streets in the Downtown and California Avenue areas. Allow medical offices with a retail component on University and California Avenues (CUP required, and staff may impose additional conditions). Require design standards and CUPs for large spaces. Simplify office use restrictions. SUMMARY MINUTES Page 3 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 • Midtown and Charleston shopping centers: Use the CN use table with footnotes. Streamline regulations into a use table to eliminate confusion and inconsistencies. Remove the -GF combining district designation. Allow residential uses on upper floors and behind retail. Limit office uses to neighborhood-serving uses. Expand allowed uses, including retail-like uses. • Streamline permitting: Shift certain conditionally permitted uses to permitted uses (uses by right). Allow the Director to interpret the list of allowed uses in commercial PCs and permit similar uses. Replace subjective findings and waivers/adjustments with expanded uses and standard conditions. Currently, a retailer may view a CUP as a time commitment or an obstacle. “Administrative Use Permit” will replace the term “conditional use permit” to acknowledge staff review and approval. • Parking: Establish blended parking rates for the California Avenue Parking District. Modify Transportation Demand Management (TDM) thresholds, such as exempting small retail additions. Increase shared parking opportunities. • Exempt nonretail zoning districts: Multifamily residential zones RM-30, RM-40, NV- R3, NV-R4; and office/manufacturing zones: ROLM, ROLM(E), RP, RP(5), GM (except within the San Antonio Road Area Plan). The staff recommendation was for the Committee to recommend that the City Council adopt an ordinance amending sections of Titles 16 and 18 and the Zoning Map to implement retail vitality measures. Item 1 Public Comment: 1. Charlie Weidanz of the Palo Alto Chamber of Commerce expressed the Chamber’s strong support for the staff’s recommendation and urged the Committee to unanimously recommend approval of the retail vitality ordinance to the City Council. The proposed ordinance reflected years of analysis, stakeholder outreach, consultant recommendations, and reviews by the Planning and Transportation Commission and the Retail Committee, along with collaboration between the City and the business community. The ordinance addressed a problem that everyone agreed needed attention: reducing vacancies and improving the vitality of Palo Alto’s commercial districts. Charlie Weidanz noted that retail had changed dramatically over the last decade, and successful business districts provided flexibility, clear regulations, and an environment that allowed businesses and property owners to respond to changing market conditions. Charlie Weidanz highlighted the draft ordinance’s streamlined regulations, reduced overlapping and conflicting requirements, expanded opportunities for retail and retail-like businesses, simplified permitting process, and greater certainty for prospective tenants, property owners, and investors. Businesses considering Palo Alto compare it to other communities throughout the Peninsula. The easier it is to understand our SUMMARY MINUTES Page 4 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 rules and navigate the approval process, the more competitive Palo Alto becomes as a place to invest, lease space, create jobs, and serve customers. Charlie Weidanz stated that the draft ordinance’s practical, balanced reforms supported the City’s goal of enhancing business vibrancy while maintaining the qualities that make Palo Alto unique. 2. Ken Hayes from Hayes Group Architects supported adopting the proposed retail vitality measures into the municipal code. Ken Hayes believed these modifications would increase the flexibility and clarity needed to accommodate a wide range of potential businesses and tenants in our community. A healthy community has all storefronts and building floors occupied by tenants, which brings life to the sidewalks and attracts customers to businesses. Ken Hayes urged the Committee to adopt the ordinance this evening unanimously. However, the ordinance did not address historic buildings, which Ken Hayes considered treasures that needed to be preserved. Historic properties often feature unique architectural characteristics related to their historical use, such as churches, civic buildings, and old theaters. To ensure those buildings remain viable, Ken Hayes recommended allowing flexibility in permitted uses. Occupying historic buildings with tenants is essential to their financial health and maintenance, which in turn enhances the vitality of the community and neighborhood. The Palo Alto Comprehensive Plan addressed the need for flexibility and historic preservation, as highlighted in the letter included in tonight’s packet. For example, Policy L-7.9 allowed compatible nonconforming uses for the life of historic buildings. The Varsity Theatre is a Category 1 historic property, the highest level of historic integrity. Since HanaHaus moved out, approximately two-thirds of the ground floor, nearly 10,000 square feet, has been vacant. The theatre’s architectural nuances and restrictions on permitted uses discouraged retailers, underscoring the need for flexibility in allowed uses, as outlined in the Comprehensive Plan. The theatre’s entrance from University Avenue featured a 90-foot-long courtyard leading to the building. The building had a 35-foot frontage but widened to triple that size at the rear, where there were no street-facing walls or windows. Allowing office use in the non-street-facing rear portion of the Varsity Theatre would create more opportunities for prospective tenants and help the owners maintain the building's viability. The rear area not occupied by Blue Bottle was 10,000 square feet, a significant space that is not easily subdivided because a glass ceiling in the center reveals the historic ceiling 40 feet above. Typically, neighborhood-serving offices do not occupy 10,000 square feet. Allowing standard professional administrative office uses in the rear portion of the Varsity Theatre would provide the necessary flexibility to keep the building leased. It has taken considerable time to address the retail vitality amendments, so Mr. Hayes felt it was crucial to move forward with determination this evening; however, he requested that the Committee consider, in the near future, the fate of historic properties and strategies to keep them vibrant. SUMMARY MINUTES Page 5 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 3. Peter G.’s family owns a building at 451 University that has been vacant for years despite their diligent efforts to find tenants. The building is large and deep, spanning almost 8,000 square feet across 2 levels. Its layout does not divide sensibly, and it is situated at the far eastern end of University Avenue, at Kipling Street. As you travel east on University Avenue toward Middlefield, foot traffic ceases at Kipling Street, leading some to refer to the area as the "dead zone." Neko Health, a company that provides AI-based health screening, was interested in being a tenant but that would require an update to the personal services definition. With its modern, spa-like approach, Neko Health used advanced scanning technology, computer modeling, and AI to make preventive health screening easy, fast, and accessible. Neko did not provide on-site treatment and did not fulfill medical orders. Neko’s service was strictly elective and offered directly to the public. Neko Health operated locations in Downtown London and Stockholm. To welcome Neko to University Avenue, Peter asked the Committee to consider adding a new category to the existing list of 9 permitted personal service uses with the following language: Health screening, including biometric body scanning, imaging, and other health testing services directly serving the public, so long as no medical treatment and not primarily filling outside medical orders. 4. Steve Levy expressed hope that the Committee could address the Council’s contradictory statements on office use. The Policy and Services Committee sought to limit office use to support housing initiatives. Council Members participating in discussions about the San Antonio Area Plan suggested that Presidio Bay Ventures’ office-like proposal in the CTI area would be positive in support of housing. According to Steve Levy’s conversations with Stanford, providing incentives to combine office or hotel space with housing in the shopping center and Research Park would be beneficial. An earlier Committee report indicated that the lack of office space downtown has contributed to a decline in retail activity due to insufficient customer presence. Building a customer base is crucial for business vitality. Steve Levy urged the Committee to help the rest of the Council clarify a consistent stance on office space as it relates to economic vitality. Steve Levy wrote a memo on job trends, which the staff will present later tonight. Although Steve Levy was leaving the meeting, he was available to discuss this topic further offline. 5. Trevor Colbert spoke via Zoom on behalf of Neko Health. Trevor Colbert asked the City to support expanding the permitted uses on University Avenue in the proposed ordinance. Neko Health, founded by Daniel Ek, Spotify’s founder and former CEO, aims to prioritize preventive care. Unlike traditional medical offices, Neko does not diagnose or prescribe, and physicians do not perform clinical procedures on-site. Instead, Neko uses non-invasive visual and thermal scanning technology combined with AI to provide clients with valuable health data. After their initial scans, nearly 80 percent of members received a clean bill of health, 13 percent were identified as needing medical treatment or monitoring for conditions they were unaware of, 6 percent had significant health issues, and 1 percent received potentially lifesaving SUMMARY MINUTES Page 6 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 interventions for serious conditions such as aortic aneurysms, severe cardiovascular disease, and malignant melanoma. Neko chose to operate in vibrant, walkable retail corridors to make personal health services feel accessible and welcoming. Neko’s custom interior designs often cost several times the national average for buildout. Neko has a waitlist of over 300,000 people, ensuring consistent, reliable foot traffic every hour. Neko’s operating hours cater to clients' lifestyles, with availability on weekday evenings and weekends. Neko designed and manufactured the technology behind its health screenings. Palo Alto has been the epicenter of many technologies that have reshaped modern life. The people who live and work in Palo Alto understand the significance of being early adopters of important innovations. Neko was not just seeking a retail address; it was searching for a home that embodied its vision for the future of preventive health. 6. Elizabeth Wong owns several buildings in Palo Alto. Elizabeth Wong noted that although the proposed retail vitality ordinance was very positive, every public speaker mentioned uses that were not included. Elizabeth Wong’s buildings at 102 and 116 University Avenue are glass and concrete structures that were not designed with retail frontages but were built as office spaces and have been vacant for the last 5 years. Elizabeth Wong was discouraged from applying for a Conditional Use Permit (CUP) to allow offices on the vacant ground floors of both of her buildings because her application would likely be denied. One of the tenants on the upper floor expressed interest in renting the lower floor. Elizabeth Wong wanted the ordinance to address more uses and situations. Councilmember Lu thought the AI health scanning service seemed acceptable and wondered why it did not fit the definition of other personal service or medical office uses. Jennifer Armer, the Assistant Director of Planning and Development, explained that the code defines a medical office as one with a state-licensed medical professional present. The PTC discussed the topic extensively but did not reach consensus on a definition to recommend for adoption at this time; however, the Council may be interested in addressing this issue further. Consultant Eisberg acknowledged the public commenter’s suggestion for a personal service use that does not provide treatment. There were state licenses for medical professionals, nail salons, and hair salons. Councilmember Lu was open to considering a slightly broader definition of personal services. In reconciling the map in the packet with previous discussions by the PTC and the Council about retail nodes, Councilmember Lu concluded that we were preserving retail nodes by essentially retaining all the CN and CS retail along El Camino. SUMMARY MINUTES Page 7 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 Assistant Director Armer stated that the proposed change to retail preservation acknowledged that it may not be suitable for certain multifamily residential zones and that, in some of the other listed zones, it was not the type of retail that this retail preservation was intended to preserve. There was a cutout for the ongoing San Antonio Road Area Plan. Vice Mayor Stone inquired whether the proposed ordinance would permit body scanning, what modifications would be required to allow it, and whether the staff could foresee any unintended consequences from expanding the definition to include body scanning. Assistant Director Armer replied that including an additional listing under personal services was required to permit body scanning. In response to concerns raised during the PTC’s discussion, the public commenter suggested the following language in J on Packet Page 64 (Attachment E, public comment) for the Committee’s motion to request incorporation into the draft ordinance: “Health screening, including biometric body scanning, imaging, or other health testing services directly serving the public so long as no medical treatment and not primarily fulfilling outside medical orders.” From staff's perspective, this wording should provide sufficient direction and help differentiate these services from others. Consultant Eisberg believed that the proposed language in J was too narrow and failed to encompass hybrid uses found in other city locations, such as aesthetic treatments, Botox, and wellness spas. If the City and this Committee were interested in broadening the range of medical-related uses with retail-like frontage, Consultant Eisberg suggested allowing more flexibility for elective, non-emergency, wellness, and aesthetic treatments, either by stating that they are not categorized as medical offices or by remaining silent and leaving the interpretation to be made at the staff level. Vice Mayor Stone did not want the City to face another situation with Mini Cat Town, so he asked whether the new animal care definitions allowed Mini Cat Town to remain on Cal Ave. Assistant Director Armer confirmed that it did. Vice Mayor Stone questioned how the change to allow housing on the upper floors and behind retail spaces in the Midtown and Charleston Shopping Centers could expose those sites to various state housing laws and variances and might result in significant impacts on the surrounding neighborhoods. Assistant Director Armer stated that many of Palo Alto’s commercial zones allow housing. Clearly stating that housing can be located above or behind retail spaces will preserve the retail frontage along the street and maintain the character of those commercial districts. The comprehensive plan allows housing in those commercial zones as part of a mixed-use project. Consultant Eisberg noted a table in the zoning code stating that residential uses were not permitted in Midtown and Charleston Shopping Centers. The buildings there were currently single-story. The CN base district did not allow ground-floor residential. SUMMARY MINUTES Page 8 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 Attorney Jensen explained that as long as residential use is allowed, there is a possibility of waiving requirements for ground-floor retail or of taking incentives or concessions to eliminate those uses. The state density bonus law applies to qualifying projects. Staff reviewed applications alongside the code to interpret the existing ambiguity. A decision on whether to allow housing could help clarify that ambiguity. If there were a decision to remove the housing designation, Attorney Jensen believed it would require a general plan amendment, which could raise issues of compliance with state law. Councilmember Reckdahl asked whether, if nothing changes, someone could request a density bonus project and a waiver to eliminate ground-floor retail because the underlying zoning is CN, and whether allowing second-story housing would increase that risk. Attorney Jensen believed an applicant might request a waiver but it was almost certain they would request an incentive or concession. Under state density bonus law, the allowable density was based on whichever was higher, the zoning ordinance or the comprehensive plan. The Committee has the opportunity to address a potential inconsistency between the comprehensive plan and the zoning ordinance; however, Attorney Jensen noted that once you open the door to housing, there is a risk of losing retail, a common issue when redeveloping some of the older shopping centers in the region. Councilmember Lu noted that the Bill's and Philz 1-acre site was listed on the market for approximately $9M or $10M. It was marketed for development under the state density bonus law and a retail waiver to build housing. This location posed challenges for new retail establishments due to its isolation from other Middlefield shopping areas. Councilmember Lu inquired about the possibility of rezoning sites to allow housing while still preserving some retail elements in the CN and CS zones. Councilmember Lu suggested that the Council may want to refer this to the Economic Development Committee as a follow-up at an upcoming meeting to provide a clear recommendation to the rest of the Council. Councilmember Reckdahl supported second- and third-story housing at these locations but was concerned about jeopardizing retail spaces; therefore, he proposed that the Committee postpone discussion of that aspect. Councilmember Reckdahl asked whether we were eliminating CUPs entirely or only certain types, and whether staff believed an AUP would be sufficient. Councilmember Reckdahl supported the expansion of personal services but did not want to encourage a lack of expertise. A doctor could be available on- site to provide expertise but not perform procedures. Councilmember Reckdahl cautioned that it would not be ideal to prevent a doctor from being present if a business thought it would be useful to have a doctor but took a risk because they wanted to be on University Avenue. Councilmember Reckdahl found the proposed language on Packet Page 64 to be a good starting point because it indicated that a doctor does not direct it; however, it could be expanded in the future to make it more general. In reply to Councilmember Reckdahl’s SUMMARY MINUTES Page 9 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 question about whether laser facial resurfacing or Botox injections were considered medical or day spa services, the answer was that Botox is considered medical. Councilmember Reckdahl referred to Slide 11 and the map on Packet Page 61, noting that the sites were scattered and did not represent traditional retail locations. Councilmember Reckdahl asked whether staff could provide Council with an estimate of the total sales tax generated by these sites collectively. There is concern that allowing these retail sites to convert to other uses could unintentionally harm the budget. For instance, Carmel Stone Imports is profitable and pays sales tax but it may be more lucrative for them to build housing instead, which would result in a loss of sales tax revenue for the City. Assistant Director Armer explained that the CUP was renamed the AUP. The director has the authority to elevate an AUP for review at a public hearing. It may be difficult to provide Council with an estimate of the sales tax collectively generated by the sites on the map on Packet Page 61 because the report will likely go out tomorrow for Council’s meeting on the 15th. Consultant Eisberg explained that the differences between a day spa and a medical office were the treatments offered, the provider of services, and licensing. Consultant Eisberg had not conducted a sales tax analysis. The map on Packet Page 61 indicated whether a discontinued use would need to be replaced by a retail or retail-like use. The San Antonio Area Road sites were exempt. Many of the GM and ROLM sites affected by retail preservation involved building materials with potential tax implications; however, most of those businesses were located in the San Antonio Road Area and would not be affected by this proposal. Councilmember Reckdahl referenced Slide 7 and asked whether medical offices on University Avenue were currently prohibited. Councilmember Reckdahl recalled that during last year's discussion, the consensus of the Retail Committee was to allow medical offices on the side streets, Hamilton, and Lytton, but that it was inappropriate to have medical and dental offices on University Avenue. Assistant Director Armer confirmed that medical offices were not currently permitted on the ground floor. The ground-floor overlay (GF) included Hamilton Avenue and some parallel streets. This proposal would allow neighborhood-serving offices, including medical offices, provided they do not face University Avenue. An AUP process would be required for medical offices, with the condition that a retail component be at the front. If this were a concern, the Committee could remove this portion from the ordinance. Consultant Eisberg explained that the CD-C Zone currently allowed medical office use; however, it was not a permitted use in the ground floor (GF) overlay. Councilmember Reckdahl requested that medical offices be removed from the draft ordinance to keep University Avenue unchanged. SUMMARY MINUTES Page 10 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 Vice Mayor Stone expressed his concern about the potential loss of retail establishments in Midtown and Charleston, which contributed to their vibrancy and made them special. Vice Mayor Stone requested Consultant Eisberg to provide her suggested definition for health screening, as he wanted to ensure it would avoid a plastic surgery center. Consultant Eisberg suggested “elective, nonemergency, wellness or aesthetic treatments.” The PTC had not vetted the proposed language, so Councilmember Reckdahl suggested referring this to the PTC to discuss whether to expand the definition to allow medical screening. Councilmember Reckdahl asked whether staff found any of the proposed wording in J problematic and whether “primarily” could be removed from “not primarily fulfilling outside medical orders.” Attorney Jensen explained that using the word "primarily" would give staff flexibility to interpret the provision in line with the zoning district's objectives. It was customary practice to permit businesses to have ancillary uses alongside their main use, as reflected in general terms or in specific language in zoning codes. Attorney Jensen did not identify any legal concerns with the proposed wording, provided the Planning Department was comfortable with its implementation. Assistant Director Armer was comfortable with the proposed language in J. If there were any code complaints, staff would address them at that time. Councilmember Lu found the wording in J acceptable. Councilmember Lu asked whether it was anticipated and intended that neighborhood-serving medical offices with on-site retail would include med spas with a doctor who offers Botox and other elective medical procedures. Councilmember Lu thought that having medical office use on University and California Avenues was better than a vacancy. Councilmember Lu emphasized that good retail space needs foot traffic and services residents use, which would help maintain investment in the area and generate sales tax revenue. California Avenue is a neighborhood; however, if the desire was for University Avenue to be a highly curated, high- end destination, we might consider removing medical office use from University Avenue. Assistant Director Armer cited an example of a neighborhood-serving medical office with on-site retail, Site for Sore Eyes, which has an eye doctor and sells glasses. Councilmember Reckdahl reiterated his request for the PTC to review this because, based on his conversations with individual commissioners, the Retail Committee and PTC heard this last year and did not want medical on University. Some retail businesses may not want to take an entire large unit, so Councilmember Reckdahl was okay with having an unrelated business in the front half with medical in the back half on the side streets, Hamilton, and Lytton, but not on University and California Avenues. SUMMARY MINUTES Page 11 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 Assistant Director Armer believed that the PTC supported medical offices with on-site retail fronting University and California Avenues, rather than personal services with a lobby entry. However, the PTC did not make a specific recommendation on med spas and medical scanning. The PTC was unsure of the appropriate depth and floor area requirements for retail spaces, so they asked the consultant to investigate this matter further. Consultant Eisberg thought the PTC was receptive to medical offices on University and California Avenues but determining which types of uses were suitable was a matter they referred to the Council. City Manager Ed Shikada stated that the PTC was comfortable allowing medical offices with on-site retail on University and California Avenues with an AUP. Councilmember Lu asked whether there could be a process for holding additional meetings on the retail ordinance to consider modifications every couple of years. Councilmember Lu suggested that the Council could include this when setting its yearly priorities. Councilmember Lu noted that the 102 University Avenue building's street frontage was angled and did not face pedestrian traffic, so he suggested that the first floor of that building and the far end of University Avenue could be medical offices. Councilmember Lu recommended implementing the PTC recommendation but perhaps excluding the area from Starbucks to Blue Bottle to allow flexibility and avoid putting the prime section of University Avenue at risk for less walkable uses. Assistant Director Armer stated that the work plan did not include further work on the retail ordinance and that, realistically, such work would not occur until after the comprehensive plan update is completed in the coming years. Councilmember Reckdahl questioned whether the optometrists on Cal Ave were established before the zoning changes or how they came to be there now. Vice Mayor Stone suggested pulling neighborhood shopping centers and medical offices with on-site retail for further discussion and advancing the other parts of the ordinance, including the modification to add health screening. Assistant Director Armer explained that optometrists have been allowed as a retail use because their spaces primarily consist of retail areas, with an exam room located in the back to support that retail function. A proposal for Hamilton featured a floor plan that allocated more space for exam rooms, leading to the conclusion that it was more of a medical office than a retail establishment and not permitted under the current regulations. The proposed ordinance would allow neighborhood-serving offices on streets other than University and California Avenues. Assistant Director Armer believed that medical offices with a certain depth of retail space were currently allowed on California Avenue with a CUP. SUMMARY MINUTES Page 12 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 Consultant Eisberg was uncertain whether the R overlay on California Avenue allowed medical offices, and she needed to verify whether medical offices were permitted in the CC(2) District. MOTION: Councilmember Lu moved, seconded by Councilmember Stone, to recommend the City Council adopt an ordinance to amend various sections of Titles 16 and 18 of the Palo Alto Municipal Code (PAMC) (Attachment A) to implement retail vitality measures related to Comprehensive Plan policies and the City Council's 2025 Enhance Business Vibrancy Priority with additional language to allow: • Health screening uses similar to packet page 64 • A modification not to allow medical offices on University Avenue • Refer the Economic Development Committee on the hearings on housing in neighborhood shopping center, and locations and definition of medical office and personal services MOTION PASSED: 3-0 2. Recommendation to the City Council on an Ordinance to Amend Various Sections of Title 16 (Building Regulations) and Title 18 (Zoning) of the Palo Alto Municipal Code to Implement Retail Vitality Policies in the Comprehensive Plan, including changes to the Zoning Map for parcels zoned CN(GF). CEQA Status: The Ordinance is Consistent with and Represents Implementation of Adopted Policies in the Comprehensive Plan, for Which an Environmental Impact Report (Comprehensive Plan EIR) was Certified on February 5, 2016. Alex Andrade referred to this item as the "shrink wrap" rule. On February 25, the PTC unanimously recommended that the text amendment be presented to the City Council. The amendment would permit the replacement of existing noncompliant floor areas through renovation or the construction of new buildings, without limiting it to the current building envelope. Steven Switzer, the Senior Historic Planner, delivered a slide presentation. The Commercial Downtown (CD) District was established in 1986 through Ordinance 3696. A 1988 report concluded that some buildings subject to the new zoning standards could be remodeled or replaced, provided there was no increase in noncompliant floor area. In 2013, a proposal sought to relocate approximately 6,000 square feet of space from the basement of 261 Hamilton to a rear addition. However, in 2014, the Council clarified that Section 18.18.2 prohibited transferring noncomplying floor area from below grade to above grade, which led to the 261 Hamilton project no longer being pursued. In 2015, the Council directed staff to prepare a code amendment to reinforce this provision and its SUMMARY MINUTES Page 13 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 interpretation. In 2017, Ordinance 5373 was enacted, which defined "building envelope" and prohibited replacing noncomplying floor area in a manner that altered the building’s three-dimensional shape, commonly referred to as the "shrink wrap" rule. Following a 2022 prescreening that allowed for the replacement of noncomplying floor area at 616 Ramona Street, the Council provided direction to staff and the applicant on items to investigate if a text amendment was pursued. The draft text amendment in Attachment A will remove subsections 18.18.120(a)(2)(C) and 18.18.120(b)(2)(C), along with all references to “grandfathered.” This change will permit the demolition and replacement of existing noncompliant floor areas (through renovations or new construction) with different heights, footprints, and building envelopes, provided the replacement complies with the zoning code. A draft ordinance implementing this text amendment is included in Attachment D. There were 302 parcels zoned as CD, of which 66 had a floor area ratio (FAR) greater than 1:1, making them non-complying properties. Of the 66 parcels directly affected by the proposed text amendment, some have been developed recently and are unlikely to be rebuilt soon, while the remaining 47 are likely to be impacted. Staff recommended that the Committee recommend that the City Council adopt an ordinance to modify the Municipal Code Section consistent with the applicant’s request. Some considerations for the Committee’s discussion include: Feedback from the PTC meetings held last year and in February 2026, which showed overall support for reducing development barriers and for the applicant's proposed text amendment; City-led initiatives affecting the downtown area; the Downtown Housing Plan; Senate Bill (SB) 79; Housing Element Program 3.9; Attachment C, the list of potentially impacted properties; and Council Priorities for housing and economic vitality. Ken Hayes of Hayes Group Architects discussed the economic vitality and renewal of downtown, as well as fairness to property owners. Public records, confirmed by staff at the PTC meeting, show that no new buildings subject to the shrink-wrap rule have been constructed downtown since the rule was adopted 10 years ago. From 1986 until the shrink-wrap rule was enacted in January 2016, property owners could demolish old buildings and replace them with new ones that maintained the existing floor area. A City Manager's 1988 report noted that noncomplying buildings, during remodeling or replacement, could be reconfigured in length, width, and height, if there was no increase in their noncompliant floor area or height. The shrink-wrap rule defined the building envelope as the three-dimensional shape and size occupied by an existing building. This meant that if a property owner demolished their noncomplying building, they could only rebuild to match the existing structure. If the property owner wanted to increase the floor-to-floor height or alter the footprint, they had to remove all noncomplying floor area that exceeded a 1:1 FAR. In a Class B building, existing floor areas were worth around $1,200 per square foot. For instance, a 2-story building on a 5,000-square-foot lot could lose $6M in value because its owner is required to eliminate noncomplying floor area. SUMMARY MINUTES Page 14 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 Ken Hayes of Hayes Group Architects showed photos of noncompliant buildings. The Retail Preservation Ordinance prevented the removal of basement floor area, and increasing the height of the building or the roof was not possible due to the shrink-wrap rule. Ken Hayes believed that eliminating the shrink-wrap rule would benefit downtown and building owners by allowing the construction of more accessible, code-compliant, healthier buildings that meet contemporary needs and create more desirable retail spaces with higher ceilings and glass storefronts, attracting more retailers to Downtown Palo Alto. These new structures would be greener, featuring daylighting, energy efficiency, all-electric systems, and solar arrays to offset embodied carbon. Downtown Palo Alto competes with Stanford Shopping Center, Burlingame, and San Mateo, where they have beautiful retail buildings. The ability to replace the commercial floor area would encourage property owners to consider building mixed-use housing projects. Ken Hayes believed that replacing existing spaces with improved designs would increase the tax base without adding commercial floor area and was fair to building owners who have paid property taxes and parking assessment fees on their existing floor area for years and who may soon be asked to pay assessment fees for the downtown improvement plan. Ken Hayes requested that the Committee remove the shrink wrap rule subsections 18.18.120(a)(2)(C) and 18.18.120(b)(2)(C) and join the PTC's unanimous vote to adopt the proposed text amendment. Ken Hayes of Hayes Group Architects wanted to add a comment regarding the previous agenda item, urging the City to consider allowing 2-family residential units in the downtown area. The current definition of residential use in the downtown area was multifamily. The City’s definition of multifamily was 3 or more units. Item 2 Public Comment: 1. Charlie Weidanz from the Palo Alto Chamber of Commerce expressed the Chamber’s strong support for the staff recommendation on the proposed amendment to Section 18.18.120. The amendment aimed to eliminate barriers to reinvestment in Downtown Palo Alto by permitting the reconfiguration of existing floor area within replacement buildings without increasing the level of noncompliance. The proposal did not create new development rights or increase allowable floor area. Instead, it restored the flexibility that existed for decades prior to 2016 and allowed the reconfiguration of existing floor area in ways that encouraged reinvestment, modernized aging buildings, improved retail spaces, and better positioned properties for future mixed-use and housing opportunities. Buildings and spaces need to meet market demand. Functional, attractive, and updated buildings support tenants, attract customers, improve the public realm, and strengthen the long-term viability of our commercial districts. The Chamber urged the Committee to support the proposed amendment unanimously. SUMMARY MINUTES Page 15 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 Vice Mayor Stone voiced his support for the staff and PTC recommendation. Councilmember Lu agreed. Councilmember Reckdahl requested staff’s opinion on housing impacts. Councilmember Reckdahl suspected the shrink-wrap rule was passed to encourage conversions of office spaces to mixed-use developments. Senior Historic Planner Switzer estimated that about 100 residential units could be affected, assuming a development of 2 to 4 units per property. Following the Council's Monday discussion, Planner Switzer reviewed parcels within the SB 79 rings. SB 79 would affect approximately 4 of the listed properties in the immediate ring and about 20 properties in the quarter-mile ring. Removing the shrink-wrap rule did not prevent a developer from building housing on their property; the question was which tenant would be more economically viable: office space, residential units, or retail. Attorney Jensen believed Section 18.18.120 required a continuation of the same use. Senior Historic Planner Switzer explained that this code section affected noncomplying uses. However, if any of the uses specified in the CD district were redeveloped, a project could be proposed, a tenant could improve the property and obtain an occupancy permit for the new use in that space. If a noncomplying use is to continue, it must comply with the applicable code sections. Jennifer Armer, the Assistant Director of Planning and Development, explained that the "shrink-wrap rule" pertained to the size of the building, specifically its floor area. While a building may be considered nonconforming, the use of that building may or may not be nonconforming as well. The code addressed the use, but the use is not determined by the shrink-wrap rule. Councilmember Reckdahl inquired about the distinction between "noncomplying" and "nonconforming." Councilmember Reckdahl noted that if the rule change was intended to eliminate office space, they would have begun amortization, which they did not do. Instead, they allowed the office space to remain indefinitely while imposing restrictions on any changes. Councilmember Reckdahl expressed support for the text amendment. Assistant Director Armer believed that the terms "noncomplying" and "nonconforming" referred to distinct aspects: one pertained to use, and the other to the building's structure. MOTION: Councilmember Lu moved, seconded by Vice Mayor Stone, to recommend the City Council adopt an ordinance to modify Palo Alto Municipal Code (PAMC) Section 18.18.120 consistent with the applicant’s request. MOTION PASSED: 3-0 SUMMARY MINUTES Page 16 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 3. Economic Development Activity Report June 2026 Economic Development Manager Alex Andrade noted that Economist Steve Levy incorporated data from the State’s EDD into this Economic Development Activity Report. From the pandemic through the second quarter of 2024, the city's overall workforce decreased by 15,000, leaving the current workforce at about 100,000. This information was crucial to discussions about the jobs-housing ratio and the existing imbalance. Economic Development Specialist Ruth Carias presented the Economic Development Activity Report for June 2026 and the retail property metrics for the first quarter of 2026. On Downtown University Avenue, the average annual asking retail rent has increased, while the current retail vacancy rate has slightly decreased. On California Avenue, trends have remained stable, with no drastic changes in either the average annual asking retail rent or the current retail vacancy rate. Notable retail openings include Rikyu, which opened last weekend with significant community engagement, and Yutori, which opened before BTS arrived in town and gained considerable momentum. Zingster’s opened on University Avenue. La Corneta is set to open this weekend. Bistro Demiya has passed its final building inspection and will open soon. A new business, Fireclay Tile, is in the approval process and will be located across the street from City Hall. Provident Credit Union has closed its location near California Avenue and has not notified staff of any plans to relocate. During stakeholder engagement meetings with the Downtown University Avenue stakeholder group, staff discussed the Fiscal Year 2028 Downtown Business Improvement District (BID) and provided an update on the total cost of the University Avenue streetscape project. Stakeholders are considering whether to proceed with the project. Last week, California Avenue hosted a ribbon-cutting for Thursday Live, generating excitement among the community and stakeholders about the next 5 events. The Entertainment Zone will be activated during the upcoming event on June 25, from 5 to 8 p.m. Staff have coordinated with local businesses to ensure they are well prepared for the event and understand the implications for their ABC licenses. Economic Development Manager Andrade presented employment data. Although the unemployment rate was not specified, it was slightly above 4 percent, similar to pre- pandemic levels and consistent with trends in other Silicon Valley cities. Approximately 3,000 people worked remotely before the pandemic. This figure surged to 15,000 during the pandemic but there has been a steady decline, with fewer than 8,000 remote jobs in 2024. The healthcare sector and social assistance account for more than 25,000 jobs. Professional, scientific, and technical services provide more than 21,000 jobs. Approximately 14,000 jobs are in the information sector. Notably, over 90 percent of our businesses have fewer than 20 employees. Before the pandemic, about 13 businesses employed more than 1,000 workers; as of the second quarter of 2025, this number had decreased to 9 businesses. From 2020 to 2025, the number of households and the population increased slightly; however, the average number of persons per household decreased. The jobs-to-population ratio fell from 2020 to 1.47 in 2025, while the jobs-to- SUMMARY MINUTES Page 17 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 household ratio decreased from 4.28 in 2020 to 3.67 in 2025. Nearly 6,000 housing units were expected to be built by the end of the Housing Element year, which Economic Development Manager Andrade believed was 2031. This was anticipated to create a better balance between jobs and housing, especially since the overall job count was lower than it was before the pandemic. Palo Alto remained a job-rich community, and this was unlikely to change soon. Economist Steve Levy’s memo was attached to the staff report. Councilmember Lu emphasized the importance of jobs and housing for the vitality of downtown and California Avenue. Councilmember Lu heard rumors that the vacant VMware site might be leased and asked what that could mean for the job-housing balance and the potential benefits for businesses along California Avenue and in the surrounding area. Councilmember Lu noted a concerning trend of several prominent law firms relocating from Palo Alto to Redwood City. For instance, Cooley, an iconic Palo Alto law firm, Orrick, and Paul Hastings, which has a large office in the Research Park, were moving to Redwood City. These law firms likely contribute significantly to downtown and California Avenue hotel and dining revenues. This trend led Councilmember Lu to question office competitiveness and the impact of the shrink-wrap rule. Councilmember Lu highlighted the importance of maintaining an appropriate balance of jobs that regularly support local restaurants and small businesses. Economic Development Manager Andrade confirmed activity at the VMware site. A new property owner has taken approximately 1.1 million square feet, with discussions underway for about 350,000 square feet. Although a lease has not yet been signed, the potential tenant is expected to be significant and would add value to our overall tech industry. Councilmember Reckdahl inquired about the distinction between households and housing units shown on Slide 6. Slide 5 noted 13 businesses with more than 1,000 employees, a number that decreased to 9 by 2025. Councilmember Reckdahl asked whether the 4 businesses that were lost had relocated or reduced their employee count to below 1,000. Councilmember Reckdahl noted that while Slide 2 provided before-and-after statistics for California Avenue, the information for University Avenue only indicated an increase from the previous year without stating the prior number. This led Councilmember Reckdahl to question by how much the figure had changed. Economic Development Manager Andrade will get back to Councilmember Reckdahl with an explanation of the difference between households and housing units. Economic Development Manager Andrade recalled significant layoffs in the tech industry over the past few years. However, there is now a surge in hiring driven by AI and increased interest in office occupancy. In light of the economic shock following the pandemic, some companies have either been acquired or have moved out of Palo Alto. SUMMARY MINUTES Page 18 of 18 (Sp.) Economic Development Committee Meeting Summary Minutes: 06/03/2026 Economic Development Specialist Carias stated that the retail property metrics were included in the packet. For Downtown University Avenue, the average annual asking retail rent increased from $74.88 a year ago. Item 3 Public Comment: None MOTION: NO ACTION TAKEN Future Meetings and Agendas Economic Development Specialist Ruth Carias announced that the next meeting after recess is the third Wednesday of August at 4:30 p.m. Vice Mayor Stone requested a future agenda item for the Committee to discuss what actions the City could take to explore the feasibility of implementing a pop-up retail program. Previously, there had been discussions about the City potentially supporting a pop-up retail program similar to those in San Francisco and San Luis Obispo. Vice Mayor Stone spoke with a resident about this idea. Councilmember Lu thought it would be helpful for the Committee to have data to evaluate the effectiveness of pop-up programs. Councilmember Reckdahl asked whether the goal was for pop-ups to demonstrate demand and then transition into permanent businesses, or simply to attract visitors to the area. Vice Mayor Stone noted that in San Luis Obispo, pop-ups were often used to build a customer base before moving to a permanent brick-and-mortar location. Adjournment The meeting was adjourned at 7:47 p.m.