PALO ALTO — A newly-released economic analysis paints a stark picture of the challenges facing downtown housing development in Palo Alto, concluding that not a single development prototype would be financially viable under current market conditions. The findings, city officials say, reflect not just Palo Alto’s local constraints, but the broader economic and policy gridlock paralyzing housing production across California.
The Housing Development Economic Feasibility and Implementation Analysis, commissioned by the City of Palo Alto and prepared by Strategic Economics, examined a range of potential housing projects — from small four-story mixed-use condominiums to seven-story mid-rise rental apartments — in the city’s downtown area. The results were unambiguous: “The prototypes do not meet general financial feasibility thresholds under current conditions.”
Developers, the study found, cannot earn a sufficient return on investment to justify new construction, even in one of the wealthiest real estate markets in the country.
Typical downtown land costs in Palo Alto range between $600 and $800 per square foot, but none of the development types studied could support that land value. The best-performing prototype, a small luxury condominium building, reached only $505 per square foot — still far short of what landowners would accept.
The report attributes the infeasibility to a combination of factors: high construction costs, surging interest rates, expensive local fees, and investors demanding higher returns. Since 2021, construction cost inflation has outpaced rent growth across the Bay Area. As materials, labor, and borrowing costs have climbed, developers’ required profit margins have widened, making even mid-rise infill projects impossible to finance.
“Market rate housing production can be supported by ensuring housing developments in downtown Palo Alto are more likely to provide a competitive return on investment and pose an acceptable level of risk for developers,” the report concludes.
But it also acknowledges that under present conditions, that balance is out of reach.
The study analyzed seven prototypes representing typical downtown site conditions. While smaller ownership projects performed slightly better, larger rental developments — considered the backbone of regional housing production — were deeply underwater. The analysis showed residual land values for these projects ranging from negative $437 to $12 per square foot.
Adding to the difficulty, Palo Alto’s impact and permitting fees are among the highest in the region. These fees — including park, housing, and public facility charges — average more than $100 per square foot, accounting for up to 15 percent of total development costs for a mid-rise apartment building.
When the report modeled a scenario removing those local fees and affordable housing requirements, financial feasibility improved dramatically. Yet the authors cautioned that such fees fund essential city services and affordable housing programs, meaning any reform must balance fiscal needs with housing goals.
The findings echo similar reports from cities across California.
In San Francisco, a 2024 feasibility study found that fewer than 5 percent of planned multifamily projects could secure financing under current conditions.
Los Angeles has seen hundreds of entitled projects stall or be abandoned as developers struggle with construction costs and interest rate spikes. Even in the Central Valley, where land is cheaper, projects have faltered amid rising material costs and fewer subsidies.
Palo Alto’s challenge, the study notes, is compounded by its downtown’s limited parcel sizes and fragmented ownership. Most sites are smaller than a half-acre, making it difficult to achieve the scale necessary for mid-rise development.
Developers interviewed for the report said that parking requirements, even when reduced under state law, further erode feasibility — with underground parking adding up to $125,000 per space.
The analysis offers a series of potential policy responses.
Among them: increasing allowable heights and floor area ratios to spread fixed costs across more units, reducing or deferring impact fees, creating incentives to link office development rights to housing construction, and offering flexibility in meeting affordable housing obligations. Each, the report suggests, could marginally improve the economics of building downtown, though none alone would overcome the larger macroeconomic headwinds.
At the state level, the results underscore the limits of policy tools like SB 35, which streamlines approvals but does nothing to address financing costs. California’s housing shortfall — estimated at 3.5 million units — remains the nation’s most severe, yet housing starts have fallen steadily over the past two years.
In 2024, only about 120,000 units were permitted statewide, barely half of what economists say is needed annually to stabilize prices.
The state’s high-cost regions have been hit hardest. In Silicon Valley, tech layoffs and volatile interest rates have made investors cautious, freezing projects that once would have been lucrative. In San Diego and Orange County, developers report that projects once projected to yield 6 percent returns now produce less than 2 percent, rendering them unfinanceable.
For Palo Alto — long criticized for slow housing production — the report offers both a warning and an opportunity. While construction remains stalled now, the study anticipates that mid-rise development could become viable again once interest rates stabilize and rents grow faster than costs. The city, it argues, can prepare by reforming zoning and reducing regulatory barriers so that projects can advance when market conditions improve.
Still, the overarching message is sobering. Even with ambitious state mandates and aggressive local planning, the economics of building housing in California’s most expensive markets have broken down. Cities can approve thousands of new units on paper, but until financing conditions change, those projects will remain blueprints, not buildings.
In the words of one planner familiar with the study, “This is not about red tape anymore — it’s about math. The numbers simply don’t work.”
The Palo Alto feasibility report captures that reality in stark terms: a city that needs housing, has land zoned for it, and yet cannot produce it without massive cost shifts or public subsidy. Its findings mirror a statewide paradox — California has the political will and policy framework to build, but not the economic foundation to make it happen.
As housing advocates push for deeper state intervention and local governments weigh fee reductions, the Palo Alto analysis serves as both diagnosis and warning: unless something fundamental changes in how housing is financed and regulated, even affluent cities will remain gridlocked — trapped between the ideal of affordability and the impossibility of making it pencil out.
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So the Davis downtown plan isn’t going to work out as hoped.
“The prototypes do not meet general financial feasibility thresholds under current conditions.”
“Developers, the study found, cannot earn a sufficient return on investment to justify new construction, even in one of the wealthiest real estate markets in the country.”
Isn’t this what Ron O has been saying.
It didn’t originate with him.
He’s said it on here many times.
Let’s hear it, Ron O is right.
It seems you don’t understand that we’ve reported this for years (which is where he got it from) and Ron’s point is to use it to argue that there really isn’t a housing crisis, whereas the problem is closer to stagflation.
In all fairness, I “got it from” reading the Vanguard AND other sources. It’s widely reported that the state’s mandates are failing (including by the YIMBY organizations).
Even the “builder’s remedy” doesn’t usually pencil-out.
In other words, “good news, everyone”! (Citing professor Farnsworth for those who like cartoons.)
The YIMBYs and the state need fewer lawyers, and more volunteers with Habitat for Humanity (if they actually do think that more Affordable housing is needed). Then again, I look more at who is funding them, rather than what they say or do.
Part of the problem with the builder’s remedy is the 20 percent affordability requirement on top of financing and construction costs.
That is indeed a “problem” for those who only/primarily want more market-rate housing. (In other words, the actual goal of the YIMBYs and the entities which fund them.)
I found our conversation yesterday somewhat enlightening, regarding just how extreme your own views are regarding the “duty” of cities to house everyone at all income levels.
It does indeed remind me of those who think it’s the duty of the U.S. as a whole to house any portion of the 8 billion people in the world who might want to come here.
Or who want more affordable housing
“Part of the problem with the builder’s remedy is the 20 percent affordability requirement”
So that’s a problem when I thought it was all about getting the homeless off the streets? Isn’t that what we’ve been told so many numerous times that I can’t even count.
Those are different issues. There is some overlap. But permanent supportive housing is fundamentally different from affordable housing.
If developers “can’t even afford” a 20% Affordable component, maybe that’s an indication that the entire notion that affordability can be forced is flawed.
If you want “affordable”, there’s already places that provide it without a subsidy. And yet, people like you still kick and scream when you can’t move to Atherton.
But if you truly want affordability for existing renters, there is a highly effective tool for that – which doesn’t require ANY additional construction. It’s already been demonstrated to work for existing residents (and doesn’t disincentivize residents from pursuing higher income – unlike Affordable housing).
But it’s more complicated than that. It’s why I use the stagflation issue. You have to be able to construct housing but when interest rates are high, construction and labor costs expensive, that drives up the cost of housing while at the same time, limiting construction reduces supplies which also drives up the cost of housing.
It’s almost as if you don’t read anything that anyone else writes on here, when responding.
It’s hard when you edit your comment after I respond.
I’m not the one who established an editing period. Maybe you should wait for that to expire before responding.
But your responses sometimes don’t correspond with earlier comments, either.
Your focus is solely on “build, baby build” – just like the YIMBYs. You don’t even hear anything else.
We have a fundamental disagreement on what the “problem” is, or if there even is a problem. I’m inclined to think that it’s not a problem if Atherton, for example, is not a place that can house everyone at a price they’d prefer or can afford. And again, the reason I don’t think it’s a problem is because there’s places to live other than Atherton. So in that sense, I’m on the “tech billionaire’s side” in regard to their own homes, despite the fact that they’re funding the YIMBYs.
I haven’t seen Ron O say this. He’s said that population won’t grow globally so we won’t need new housing. Very different.
The analysis for the Downtown Plan in 2018 identified this as a key issue. However, the most important factor–high interest rates–is a cyclical factor that will self correct with either lower interest rates or lower real estate values in response to those higher rates. In addition, the stock market bubble is inflating expected investment returns.
Its a pity that Davis dithered when interest rates were low trying to figure out the perfect project instead of simply adding supply when the economics worked. Of course David supported the process that defeated addressing under supply all those years. You want to know why housing in Davis is too expensive? Try looking in the mirror.
“You want to know why housing in Davis is too expensive? Try looking in the mirror.”
Do you really think David has that much influence?
Don’t try to disabuse Ron of that, it ruins his narrative.
Ron G is right, in a sense.
The part that he’s wrong about is that anyone reading your articles for the past 10 years or so already knew that you don’t support Measure J – even if you didn’t openly acknowledge it.
Kind of reminds me of Obama’s “change of heart” regarding gay marriage, AFTER he got elected. (I strongly suspect that he had no problem with it BEFORE he got elected, either – but didn’t want to acknowledge it at that time.)
Ultimately, hiding one’s own views due to political concerns undermines credibility.
The irony is that I have laid out my exact position on Measure J. It’s mend it don’t end it.
As Alan M pointed out (and as discussed on here regarding what you and others propose to replace Measure J) there is no “amending it” – there’s only “ending it” and “replacing it” with something entirely different.
Might as well be Woodland at that point – they already have a voter-approved urban limit line. As I previously asked, would you care to hear my thoughts as to where they drew that line (and how it came to be)?
It seems ironic that the guy on here who doesn’t particularly like Woodland (but has a connection to it) is the same guy who isn’t trying to make Davis “become” Woodland.
And yet, the people who would prefer Woodland try to force Davis to become Woodland, rather than just leaving Davis themselves.
It’s an upside down world.
Ron O
First off as a resident of Woodland, your opinion on Davis issues is meaningless. No we are proposing amending it. Measure J/R/D already has a number of exemptions (and even an override if we don’t meet our housing targets). We are proposing to extend those exemptions to projects that meet a prescribed set of baseline features that the electorate (not including Ron O) approve. This extremist view is akin to labeling EVERYTHING that falls outside of the city limits as “urban sprawl” which is completely contrary to what legitimate anti-sprawl proponents like Smart Growth use.
To clarify, I believe that Ron G just wanted you to “come clean” regarding your views.
Being “wrong” doesn’t mean that you’re immoral, but hiding your views creates lack of trust.
I’d rather have someone just tell me that they support sprawl for affordability, if that’s what they actually believe.
Ron O
None of us support sprawl for affordability (well, Ron G may beg to differ). We want smart compact growth to create affordability. I strongly oppose sprawl which is why Davis needs to grow compactly to divert sprawl from other communities that are less concerned with the issue. Fighting smart growth in Davis is contrary to limiting urban sprawl.
Richard: It’s easy to say that you “oppose sprawl” when you make up your own definitions.
For Davis, downtown redevelopment should focus on retail and commercial. Housing is going to be high-end in any downtown project. Small-a affordable housing is going to be peripheral. Large-a affordable housing is going to be built with public monies. Attempting to shoehorn housing into redevelopment projects just delays them and clearly makes it so they don’t pencil out.
I agree with that sentiment. We have to decide how we can best achieve our housing needs. The big Affordable housing formulas are not work well and have created a stigma similar to affirmative action. I agree with goals by the implementation is becoming counter productive. Formulas that don’t reflect real choices are rarely good policy.
Davis doesn’t have any housing needs that aren’t already being met.
That’s pretty much how it works anywhere. If you build it, they (meaning non-residents) will come from somewhere else. They don’t materialize out of thin air, when housing is built in a given locale.
As far as a “stigma” is concerned regarding Affordable housing – who cares? Do we now have to worry about people’s “feelings” while voluntarily feeding at the public trough? It’s not enough that they don’t pay their “fair share”, as you put it elsewhere on this page?
Hell – let me live in it – I’ll tolerate the “stigma”. (I’d pick a place in Tiburon.)
Also, do people normally go around telling everyone that they live in public (or Affordable) housing – especially if there’s a “stigma” attached to it as you claim?
LOL
I know that you’re not embarrassed by it, at least. Nor should you be.
Though it likely is holding you back to some degree, as is relying on income from the Vanguard.
That’s one reason I think rent control is a better approach – personal income is irrelevant (and therefore does not hold back residents from earning more over time). Elon Musk could get a rent-controlled unit.
Regarding the other part of my comment, I do realize that it’s usually “jobs” that create demand for housing. Ultimately, however, housing and other costs/hassles can cause a limitation regarding job creation in a given locale. (See California Exodus, which I’d describe in a positive manner in regard to both residents and businesses relocating to places that make more sense.)
For that matter, I’m pretty sure that housing costs, for example, are a factor regarding attendance (or employment) at a given university. I’m pretty sure that I’d rather attend or work at UCD than at UC Berkeley (due to differences in housing and other costs, traffic, etc.) – all else being equal. And the same is likely true regarding a comparison between UCD and UC Merced, for some students/faculty.
And if the state continues growing (which seems unlikely), some students might make that comparison between UC Merced and UC “El Centro”, in the future. (Trying my best to pick out the biggest hellhole in California.) And then beyond that, it will be UC “Calexico” or UC “Mexicali”. (Some might think we’re already in Mexicali, these days.)
The case studies that I have read regarding densification have shown that one of the tactics discussed in this paper have been helpful other places: The city eliminating their fees which are above the direct cost of producing this housing.
There is an attitude around development in city halls that the developers are getting rich when the city helps them approve something and that is often true when you have high-margin projects like single family McMansions. The back of the envelope math on Village Farms shows $200 million in profit for that project… so the city asks for a cut. Remember that DiSC was asked to pay for a library in south davis? Its bribery really.
If we really want this kind of housing, then the city can simply stop treating the developers of those kinds of projects as a bag of cash. That will help.
There are also issues like a state law requiring two sairwells in EVERY building, regardless of size which robs too much needed floor space when the parcel size, and other things. ( I think this particular one might have been fixed recently… but height restricitons and other over-protective regulations do not help)
Downtown I think it going to be fine.. There are a number of landlords who have large enough parcels and the cost of land is low enough, but with interest rates where they are, I understand that is hard, and the city might need to invest a bit in making sure these projects go forward. Its in our best interest for them to do so because these kinds of buildings are very good for the city in terms of long-term property and sales tax revenue.
One the key problems is Prop 13. Long term homeowners do not pay their fair share of local costs so the cities have to look elsewhere to fund the services those long term homeowners demand but are unwilling to pay for. This has been a growing problem in American politics as voters demand services that they are unwilling to pay for through their taxes. Yes, developers make a lot of money but we need to be realistic about what they provide. On the other hand, we need to make sure their community design conforms with our goals, even if that makes their project less profitable.
The costs that property taxes pay for are not always directly related to housing. Same thing with parcel taxes.
Maybe folks should stop looking at homeowners as a “cash cow” in regard to the costs that all of us create.
This is especially true in regard to single family dwellings (e.g., parcel taxes).
(Not entirely sure, but I believe that apartment buildings are considered commercial property – and therefore can more easily be passed to heirs or others without increasing the property tax basis).
Also makes one wonder if Disneyland, for example, is paying its “fair share” as a commercial site.
“The irony is that I have laid out my exact position on Measure J. It’s mend it don’t end it.”
The irony is that I can’t figure out if David is a coward or a fool?
David is not a fool. He would tell you (and has before) that he’s “practical”.
Though I agree with you, that (given the political nature of the Vanguard) – David shouldn’t be afraid to acknowledge what he thinks (especially since readers can immediately figure it out, anyway).
Either way, Measure J isn’t going to be defeated – especially not right now – as you also noted. Though the current effort to eliminate Measure J, combined with widespread dissatisfaction regarding the current Measure J proposals, will likely lead to their defeat as well.
I have not seen very many positive comments (from the usual supporters of growth) in support of the current proposals. Though I suspect that they (personally) will end up voting for those proposals regardless when they finally accept that they have little to no influence over what’s being proposed.