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As Palo Alto prepares to add about 1,500 housing units to the area around San Antonio Road, city officials are confronting a harsh reality: a real estate market that favors smaller townhouse developments over the types of large apartment complexes that the City Council envisions for this part of the city.
That’s one of the main conclusions of a new analysis from Strategic Economics, a consultant that the city hired to help work on the new San Antonio Road Area Plan, a strategic document that will guide the redevelopment of the 275.3-acre area near the Mountain View border. While the main goal of the plan is to increase housing, the city is also hoping to add transportation improvements, parks and retail, effectively creating new residential communities in areas that have historically been dominated by industrial and commercial uses.
For the council, which plans to refine the San Antonio plan in June, the analysis from Strategic Economics offers mixed news. On the one hand, it suggests that five- and eight-story buildings would not be particularly profitable under the current conditions, particularly when compared with smaller townhome developments, which are easier to construct and can fetch higher sales prices per unit.
Five-story apartment buildings would face a particular challenge if they were required to supply underground parking, the consultants concluded. Eight-story buildings would do slightly better, particularly if they are not required to build underground garages, though still not as well as either of the townhome model that the consultants evaluated.
The analysis estimated that the two townhome models, one with garage parking and one with podium parking, would net a residual land value of $311 and $226 per square foot, respectively (the amount refers to the developer’s ability to pay for land after addressing all other project costs and return on investment). An eight-story multi-family complex would result in a land value of $17 per square foot under current market conditions; for a five-story project, there would be a loss of $80 per square foot.
The consultants attribute this largely to high construction and financing costs, which are having a negative impact on midrise housing development throughout the Bay Area.
“Multifamily residential development slowed in the years after the Covid-19 pandemic as rents failed to keep pace with rapidly rising construction costs,” the new study states. “The effects of these changes remain in place, as high construction costs and financing costs continue to pose challenges for delivering new multifamily projects.”
That said, the prognosis for large housing developments isn’t entirely bleak. Even though the three-story townhomes are currently more feasible than five- and eight-story residential complexes, the consultants found that “modest improvements in development conditions would likely readily enable development of these prototypes in the near future.”
To make matters even better, the city has already received several proposals for San Antonio multi-family housing projects, including two on adjacent lots at 788 San Antonio Road and 800 San Antonio Road. The council expressed so much optimism about the 120-condominium project that Yorke Lee proposed for 800 San Antonio that Lee amended the plan and added 54 units, raising the total to 174. The city’s Planning and Transportation Commission, which is not known for rubber-stamping major projects, voted 6-0 in February to advance Lee’s latest plan.
The proposal at 800 San Antonio Road is somewhat more contentious, largely because the developer, Grubb Properties, is only proposing to include 74 parking spaces for the building’s 167 apartments. The planning commission is scheduled to review the development at its April 8 meeting.
The Strategic Economics study, which was let by Derek Braun and T.J. McKiernan, aims to help the council refine its options for the planning area, which plays an outsized role in the city’s effort to add 6,086 housing units by 2031. The council plans to discuss the San Antonio plan in a study session today (April 6) and then refine its alternatives for the area in June.
The new analysis concluded that new office developments would prove an even tougher sell than residential ones, for many of the same reasons.
“In recent years, market rents for many types of commercial property have fallen or plateaued, while construction costs and interest rates have risen significantly,” the report states. “As a result, developers and investors are approaching office development with a higher level of uncertainty than in the recent past, and they require higher return thresholds for new projects to achieve financial feasibility.”
Even so, the report argues that Palo Alto continues to have a highly desirable office market, particularly in mixed-use districts with amenities. While the San Antonio area is considered secondary to the city’s “core locations” such as downtown and California Avenue, a large mixed-use office development at San Antonio can “potentially transform the Plan Area’s market position, improve the area’s ability to command higher office rents, and reduce perceptions of development risk.”
The concept that is currently on the table identifies into four major “sub-areas” that are most suitable for redevelopment: The Central San Antonio area, which stretches between Middlefield Road and Charleston Road; The North Fabian subarea, which is near the intersection of San Antonio and Fabian Way and which includes the Maxar campus; the South Fabian subarea, which abuts on North Fabian area; and the CTI campus that is located just east to the two Fabian areas.
The proposed plan also includes two “secondary subareas” with limited development potential: Alma Street and the area around Bayshore Road, next to the Baylands. It also identifies “stability” areas that are already fully development and are unlikely to see any changes.
These include the Greenhouse I and Greenhouse II residential communities at 777 and 765 San Antonio Road, respectively); and the “South San Antonio” area between Byron Street and Nita Avenue, which includes townhomes, apartment buildings and private schools, according to a report from Planning Director Jonathan Lait.
Union labor is expensive!
People don’t want to deal with parking, if parking is inadequate I don’t want to live there and I certainly don’t want to shop or visit there with small children. You can play the math numbers all you want, but you won’t change this fact.
“high construction costs and financing costs” are not the issue, its regulation driving these costs up. All these useless fees, inexcusable time delays on permitting approvals, and environmental/legal non-sense. The exact same things that prevented a high speed rail from being built also prevent housing development.