Housing Development Economic
Feasibility and Implementation
Analysis
PALO ALTO DOWNTOWN HOUSING PLAN
Prepared for:
City of Palo Alto
October 10, 2025
Housing Development Economic Feasibility and Implementation Analysis 2 Table of Contents
INTRODUCTION .............................................................................................................................. 4 APPROACH AND USE OF ANALYSIS RESULTS.............................................................................. 5 PROTOTYPES AND DEVELOPMENT ASSUMPTIONS ..................................................................... 6 FINANCIAL FEASIBILITY ANALYSIS FINDINGS ............................................................................. 9 OPPORTUNITIES FOR THE CITY OF PALO ALTO TO SUPPORT HOUSING PRODUCTION............18 APPENDIX: PRO FORMA ANALYSIS ASSUMPTIONS AND PRO FORMA STATEMENTS .............20
Housing Development Economic Feasibility and Implementation Analysis 3 Table of Figures
Figure 1: Development Prototypes Studied in the Feasibility Analysis ..................................................... 8 Figure 2: Residual Land Value per Square Foot of Land for each Development Prototype Compared to Typical Current Land Costs per Square Foot ........................................................................................... 11 Figure 3: California Statewide Cost Inflation and Santa Clara County Rent Inflation, 2011 to 2025. 12 Figure 4: Cap Rates and Sales Price per Unit for Multifamily Rental Buildings (20+ Units) Sold Between 2014 and 2025 in Santa Clara County ................................................................................... 13 Figure 5: Residual Land Value Sensitivity under Historic Market Conditions and Revenue Growth Scenarios (Prototype #5: Mid-rise Residential) ....................................................................................... 13
Figure 6: Residual Land Values per Square Foot for each Prototype with Varying Affordable Housing Requirements and Fee Level Scenarios .................................................................................................. 17
Figure 7: Revenue and Supportable Value Calculation and Results for Rental Prototypes................. 21 Figure 8: Revenue and Project Value Calculation and Results for Ownership Prototypes ................... 22 Figure 9: Total Development Cost Results for Rental Prototypes .......................................................... 23 Figure 10: Total Development Cost Results for Ownership Prototypes ................................................. 24 Figure 11: Pro Forma Feasibility Results for Rental Prototypes ............................................................ 25 Figure 12: Pro Forma Feasibility Results for Ownership Prototypes...................................................... 25 Figure 13: Revenue Assumptions for Rental Prototypes ........................................................................ 26 Figure 14: Cost Assumptions for Rental Prototypes ............................................................................... 27 Figure 15: Municipal Fee Calculations for Rental Prototypes ................................................................ 28 Figure 16: Revenue Assumptions for Ownership Prototypes ................................................................. 29 Figure 17: Cost Assumptions for Ownership Prototypes ........................................................................ 30 Figure 18: Municipal Fee Calculations for Ownership Prototypes ......................................................... 31
Housing Development Economic Feasibility and Implementation Analysis 4 I ntroduction
This report describes the findings and conclusions of an analysis completed to help identify ways to enable and attract housing growth in the Palo Alto Downtown Housing Plan area (“Plan Area”). The findings and recommendations can inform related policy considerations and decisions for inclusion in the City of Palo Alto’s Downtown Housing Plan . The Downtown Housing Plan seeks to enable and attract market rate housing development when market conditions allow, while also safeguarding affordability, livability, and fiscal sustainability.
The analysis consisted of a “financial feasibility” assessment for seven market rate housing development prototypes that correspond to typical site conditions in downtown Palo Alto. A financial feasibility analysis reflects the perspective of a housing developer, since production of market rate housing (along with any associated on-site affordable housing units or affordable housing fee revenue for the City of Palo Alto) requires developer interest in pursuing projects. This report’s findings and policy recommendations are one subset of the many considerations for crafting a plan that achieves affordability and livability in downtown Palo Alto.
The approach to the analysis reflect ed the goals of identifying challenges and opportunities for enabling housing production in the Downtown Housing Plan area through policy changes that are within the control of the City of Palo Alto. A sensitivity analysis examined ways in which different policies and evolving development conditions can improve the financial performance of the prototypes and therefore incentivize housing development activity.
The remainder of this report opens with a discussion of the approach to and appropriate use of the analysis results. The report then details the development prototype characteristics and describes findings from the financial feasibility analyses of the prototypes. Se ction V describes conclusions regarding potential policy changes to better enable and support market rate housing production in the Plan Area.
Housing Development Economic Feasibility and Implementation Analysis 5 Approach and Use of Analysis Results
A financial feasibility analysis represents a developer’s perspective on whether the financial return for a given potential development project merits pursuing that project. Strategic Economics examined the financial feasibility of seven housing development prototypes using a static pro forma model that estimated the current costs, required returns, and supportable land values for each prototype. The assumptions used in the pro forma model were based on market research, review of recent feasibility analyses, and interviews with experienced developers in the region who have completed or are pursuing projects comparable to the prototypes.
The pro forma analysis used an approach that “solves” for the remaining residual value of a development project. The analysis measured the financial performance of each prototype using residual land value analysis. In residual land value analysis, the land cost estimate is initially taken out of the equation. Instead, the analysis begins by estimating project market value, hard costs, and soft costs, and applies a minimum acceptable return threshold for a typical developer pursuing the project. The supportable land value is then calculated last, as a residual value after all costs and the minimum return are subtracted from the project’s market value.
The residual value approach is especially helpful for comparing the performance of alternative development projects since the results are expressed in equivalent terms. The residual value conceptually represents the price a developer could pay for a property while still achieving a financially feasible project. If the residual land value is negative or below the typical range of sales prices for land or underutilized prop erties, then the development project is likely to be infeasible under current conditions.
The financial feasibility results should be used as a general guide to the impact of policies on a range of development types rather than a prediction of feasibility for specific development projects. The results of the pro forma analysis represent current development conditions relevant to the generalized and prototypical housing development projects in downtown Palo Alto. This approach aligns with the analysis purpose of informing policy decisions for the Palo Alto Downtown Housing Plan. However, any actual property and development project will benefit from or be challenged by unique conditions such as existing uses, property owner motivations and acquisition/holding costs, access to financing, site - specific land use regulations, and unique pricing for construction labor and materials.
Given that development conditions undergo cyclical changes over time and the Downtown Housing Plan will implement longstanding policy changes, the feasibility analysis is focused on assessing local opportunities to enhance the likely interest in and the pace of housing development. As discussed further in this chapter’s findings and conclusions, the financial performance of development projects shifts over time as changes occur in factors often outside the City’s control. The analysis therefore focused on l ocal changes that can improve the financial feasibility of housing development in downtown Palo Alto. This perspective emphasizes ways to better enable development under current conditions and throughout the ongoing changes in the development market cycle. 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.
Housing Development Economic Feasibility and Implementation Analysis 6 Prototypes and Development Assumptions
The financial feasibility analysis examined five primary development prototypes based on two differently sized sites, with three variations of Prototype 1 located at the smaller site. The development prototypes represent a range of development densities, heights, configurations, and overall housing product types. Figure 1 provides an overview of the prototypes, followed by further details.
The development prototypes and feasibility analysis do not reflect conditions at a specific site.
However, the prototypes derive from a series of buildout “test fits” prepared by WRT based on properties in downtown Palo Alto. The relevant test fits reflected conditions for properties located at 318 University Avenue (a small mid-block parcel) and 136 Hamilton Avenue / 650 High Street (a large three-parcel site with common ownership, located near the Palo Alto Caltrain Station). The test fits were based on physical site characteristics and typical housing product types found in Palo Alto, rather than on the existing zoning and development standards in downtown Palo Alto.
In addition to their residential components, all prototype s except Prototype 5 included office and ground-floor retail space. This was to acknowledge ground floor retail requirements in areas of downtown and is based on developer feedback that office space is desirable and financially beneficial for development projects in downtown Palo Alto.
The prototypes include on-site parking for the residential units, but only in the minimal quantities likely required to make the units marketable to buyers or renters. Most of the project area is located within a half-mile radius of the Palo Alto Caltrain station. Under State l egislation authorized by AB 2097, no minimum parking requirements apply to those qualifying parcels.
Prototypes 1a, 1b, and 1c are four-story mixed-use buildings on a small 8,000 square foot (.18 acre) site. The prototypes include 2,000 square feet of retail on the first floor, 6,000 square feet of office on the second floor and up to eight residential units on the upper floors. The parking is accessed via an alley at the rear of the building and tucked under the upper floors. Prototype 1a was analyzed as a rental project and prototypes 1b and 1c were analyzed as ownership projects. Prototype 1b best reflects recently completed and proposed development projects on similar sites in downtown Palo Alto, with most projects including the maximum allowable office space and a limited number of larger ownership condominium housing units.
Prototype 2 is a horizontal mixed-use development that includes two buildings at a 20,937 square foot site (.48 acres). The buildings consist of a seven -story residential building and a four -story retail and office building. This prototype includes 55 rental housing units and approximately 21,000 square feet of office space, with parking located underground. The average residential unit size for this prototype is the same as Prototype 3 at 725 net square feet.
Prototype 3 is a vertical mixed-use building located at a property with the same site characteristics as Prototype 2. Prototype 3 includes 63 rental housing units above retail and office space on the first two floors, with parking located underground.
Prototype 4 is a horizontal mixed-use building located at a property with the same site characteristics as Prototype 2. Prototype 4 is similar to Prototype 2, but includes fewer rental housing units, more office space, and relatively cost efficient “podium” parking . This prototype was included to examine whether additional office space improves the financial performance of a mixed -use housing project and the impact of podium versus underground parking.
Housing Development Economic Feasibility and Implementation Analysis 7 Prototype 5 is a mid-rise residential building located at a property with the same site characteristics as Prototype 2. This prototype consists of an entirely residential seven-story rental apartment building with podium parking . The prototype was included to examine the performance of this building type without the influence of other commercial uses in the analysis results.
As with all real -world development projects, the prototypes’ heights and uses dictate different construction “types” that consist of differing materials with different costs per square foot of building area. Building codes specify the use of different materials for different building heights and uses based on safety requirements. Construction labor and materials costs vary with different construction “types.” As a result, costs per square foot of the building area vary with the prototypes:
• The small-scale prototypes 1a, 1b, and 1c were assumed to primarily consist of Type II light steel construction.
• Prototypes 2, 3, 4, and 5 were assumed to use mixes of “Type I” concrete or steel construction for parking structure s and office space, and Type IIIa wood frame construction for upper residential floors above the concrete podium.
• Generally, construction costs per square foot are highest for Type I construction, lower for Type II and lower still for Type IIIa.
• The analysis did not include a prototype taller than eight stories. Towers taller than mid-rise seven- to eight-story projects typically must consist entirely of Type I construction.1 These high- rises therefore incur a relatively high increase in overall fixed costs and incur high construction costs per square foot of building area compared to mid-rise “podium” buildings with a mix of Type I and IIIa construction. Type I buildings often require substantial additional height to include sufficient square feet of revenue-generating space that overcomes the large increase in fixed development costs associated with these high-rise projects. High -rise projects are typically only built under extremely favorable development conditions when rents or sales prices exceed these high construction costs.
1 “Mass timber” construction (Type IVa.-c.) can also be used to construct buildings taller than eight stories, especially in conjunction with a Type I concrete podium. Mass timber is a relatively new construction type in the Bay Area for taller residential development projects. Although costs per square foot are slightly higher than Type I construction, mass timber may become an increasingly attractive alternative for taller residential building construction as supply chains become better established and construction costs decline.
Housing Development Economic Feasibility and Implementation Analysis 8 FIGURE 1: DEVELOPMENT PROTOTYPES STUDIED IN THE FEASIBILITY ANALYSIS
Prototype 1a:
Small Vertical
Mixed-Use
Apartments
Prototype 1b:
Small Vertical
Mixed-Use
Condos (4 Unit)
Prototype 1c:
Small Vertical
Mixed-Use
Condos (8 Unit)
Prototype 2:
Horizontal
Mixed-Use
Apartments
Prototype 3:
Vertical
Mixed-Use
Apartments
Prototype 4:
Horizontal Mixed-
Use with Higher
Commercial FAR
Prototype 5:
Mid-rise
Residential
Property Characteristics
Site Size (square feet) 8,000 8,000 8,000 20,937 20,937 20,937 20,937 Gross Building Area 15,350 15,350 15,350 70,140 83,200 74,580 81,950 Retail 2,000 2,000 2,000 0 3,400 0 0
Office 6,000 6,000 6,000 20,900 22,600 34,385 0
Residential 7,350 7,350 7,350 49,240 57,200 40,195 81,950 Floor Area Ratio 1.92 1.92 1.92 3.35 3.97 3.56 3.91
Retail 0.25 0.25 0.25 0.00 0.16 0.00 0.00
Office 0.75 0.75 0.75 1.00 1.08 1.64 0.00
Residential 0.92 0.92 0.92 2.35 2.73 1.92 3.91
Parking
Parking Spaces 10 10 10 54 54 40 40
Parking Type Tuck-under Tuck-under Tuck-under Underground Underground Podium Podium Housing
Units 4 4 8 55 63 44 91
Average Unit Size 1,560 1,560 780 725 725 725 725
Tenure Rental Ownership Ownership Rental Rental Rental Rental Construction
Stories 4 4 4
7 (Residential)
4 (Office) 7
7 (Residential)
6 (Office) 7
Construction Type Type II Type II Type II Type IIIa / Type I Type IIIa / Type I Type IIIa / Type I Type IIIa / Type I Source: WRT, 2025; Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 9 Financial Feasibility Analysis Findings
The financial feasibility analysis results illustrate the relative performance of the prototypes, factors influencing that performance, and how changes in development conditions and City requirements can enhance the feasibility of and better enable market rate housing development in downtown Palo Alto. The findings therefore focus on how to enhance the financial performance of housing development in the Plan Area to motivate developers and property owners to pursue new projects.
The findings cover the following topic areas and inform policy decisions for accelerating housing development as part of the Downtown Housing Plan:
• Relative financial feasibility performance of the prototypes under current conditions • Impacts of broader development trends and opportunities • Mid-rise housing performance and opportunities
• Influence of office uses
• Parking impacts
• Sensitivity to City fees and requirements
RELATIVE FINANCIAL FEASIBILITY PERFORMANCE OF THE PROTOTYPES UNDER
CURRENT CONDITIONS
The prototypes do not meet general financial feasibility thresholds under current conditions . Typical costs for developable sites in and near downtown Palo Alto vary widely, and few transactions have occurred in recent years. However, typical sales of land and underutilized properties in and near downtown Palo Alto range from $600 to $800 per squar e foot of land. As shown in Figure 2, no development prototype achieves a minimum $600 per square foot residual land value under current conditions; two prototypes support land values that are significantly positive but still below the $600 to $800 threshold. The following findings discuss results and implications for specific prototypes.
Developers and landowners have unique investment goals, property holding costs, and other unique conditions that may allow projects that do not meet the typical land cost threshold to still proceed — although any project must generate a competitive return on investment . Property owners and developers with low land costs may choose to pursue development of a project that does not achieve the typical return on investment (expressed in this analysis as meeting the required residual land value threshold). However, any development project must still generate a competitive return on investment that corresponds to the relatively high risk of pursuing a development project. D evelopers and landowners have a wide variety of options for use of property, including selling it, holding it for sale in anticipation of improved conditions, receiving revenue from the existing conditions, or developing the property.
The financial feasibility performance of the development prototypes c an readily improve over time based on a combination of broader changes in development market conditions and actions by the City of Palo Alto that improve development project values and reduce risk. As described in detail in Section II, the financial feasibility analysis results are based on current and generalized conditions to provide a tool for gauging how changes in market conditions and City policies can improve the prototypes’ performance. Later findings of this report describes broader challenges impacting housing feasibility in the Bay Area—primarily construction cost inflation and increased thresholds for return on investment
Housing Development Economic Feasibility and Implementation Analysis 10 (related to higher interest rates)–and the report’s conclusions describe opportunities to better enable housing development in the Plan Area.
The smaller ownership prototypes significantly outperformed rental prototypes due to the relatively high local price premium for larger luxury ownership housing units compared to rental units. As shown in Figure 2, the analysis found that large r luxury ownership products —such as prototype 1c and especially 1b —perform relatively well in downtown Palo Alto due to high achievable sales prices.
Prototype 1b achieves the highest residual value per square foot of land, at $505. Prototypes 1b and 1c represent small boutique condominium projects. Palo Alto attracts a substantial price premium for condominiums compared to the larger region, with the “Zillow Home Value Index” for July 2025 estimating that typical condominiums in Palo Alto command a 149 percent value premium compared to typical condominiums in Santa Clara County overall.2 While achievable rents in downtown Palo Alto are also among the highest in the surrounding area, they do not command a comparable overall premium. As of April 2025, CoStar reported that average effective rents per square foot for apartments in Palo Alto were only 6.3 percent higher than in Santa Clara County overall.3 The mid-rise rental prototypes are relatively infeasible in downtown Palo Alto under current conditions, but feasibility outcomes can change quickly for such larger and higher density products as development conditions shift. As shown in Figure 2, Prototypes 2, 3, 4, and 5 generated residual land values of between -$437 and $12 per square foot of land . These rental prototypes represent a mid- rise product that achieves a relatively high density in an efficient format—especially when built at sites of at least half an acre. However, broader market challenges are temporarily constraining the financial feasibility performance of these prototypes. The following subsection of this chapter describes these challenges and how shifting development conditions can especially support higher density mid -rise housing products.
2 Based on data gathered in August, 2025, the Zillow Home Value Index (ZHVI) estimated condominium values of $1,258,451 in Palo Alto and $842,418 in Santa Clara County. More details regarding the ZHVI are available at https://www.zillow.com/research/data/. 3 Based on CoStar data for all tracked apartments, gathered in April, 2025.
Housing Development Economic Feasibility and Implementation Analysis 11 FIGURE 2: RESIDUAL LAND VALUE PER SQUARE FOOT OF LAND FOR EACH DEVELOPMENT PROTOTYPE COMPARED TO
TYPICAL CURRENT LAND COSTS PER SQUARE FOOT
Source: CoStar, 2025; Strategic Economics, 2025.
IMPACTS OF BROADER DEVELOPMENT TRENDS AND OPPORTUNITIES The following findings discuss how broader regional and national factors are influencing the financial feasibility outcomes of the housing development prototypes for downtown Palo Alto, and how changes in these factors can readily improve the prototypes’ performance in the future.
Each of the factors influencing financial feasibility is highly dynamic , and development activity and conditions are cyclical. Project costs can fluctuate due to changes in construction labor costs, materials costs, and a variety of other factors. Similarly, a development project’s revenue can vary depending on the availability of housing supply in the local market, changes in the attractiveness of a project’s location, or other factors impacting demand in the local market. The minimum threshold for investment return can also fluctuate based on external factors such as interest rates and trends in real estate capital markets—recognizing that real estate development must compete against all other investment options.
The current primary challenges for the financial feasibility of housing development throughout the Bay Area are related to construction cost inflation and increased thresholds for return on investm ent (related to higher interest rates). These are shared challenges that are slowing housing development throughout the Bay Area. Figure 3 shows the annual percent change in the California Construction Cost Index produced by the State of California . The index measures change in labor and materials costs in the San Francisco Bay Area and Los Angeles regions. Costs rapidly increased in 2021 through 2023, greatly outpacing rent growth in Santa Clara County. However, rent growth also often outpaces construction cost growth, such as in 2012 through 2015, 2018, and 2024. $23
$505
$394
($437)
($259)
$12
($76)
-$600
-$400
-$200
$0
$200
$400
$600
$800
$1,000
Prototype
1a:
Small
Vertical
Mixed-Use
Apartments
Prototype
1b:
Small
Vertical
Mixed-Use
Condos (4
Unit)
Prototype
1c:
Small
Vertical
Mixed-Use
Condos (8
Unit)
Prototype 2:
Horizontal
Mixed-Use
Apartments
Prototype 3:
Vertical
Mixed-Use
Apartments
Prototype 4:
Horizontal
Mixed-Use
with Higher
Commercial
FAR
Prototype 5:
Mid-rise
Residential
Residual Value per Square Foot of Land
Typical Range of Land Values in Downtown Palo Alto
Housing Development Economic Feasibility and Implementation Analysis 12 Figure 4 shows that capitalization rates (which describe the ratio between a property’s annual income and its market value) increased in 2023, indicating a decline in investor confidence in multifamily investments. This decline was in response to higher interest rates at the national level and a softening of the rental market throughout much of the Bay Area. Increased perceptions of risk and required return on investment also led to a decline in t he average market value of multifamily properties per housing unit in Santa Clara County since 2020, as also shown in Figure 4.
Future changes in the aforementioned factors can readily enable more housing development projects to become financially feasible. Figure 5 demonstrates the variability of residual value for development Prototype 5 (the mid -rise housing-only product) in response to changes in cap rates and achievable rents.4 Essentially, the chart demonstrates that this prototype was financially feasible during a period of lower cap rates and required return on investment, and could again become financially feasible with modest increases in rents and eventual declines in required investment returns. These changes will take time to occur ; however, changes to local polic ies could better enable housing development in downtown Palo Alto once these market conditions turn favorable.
Developers in Palo Alto and nearby communities are still proposing housing projects, indicating confidence in the future financial feasibility of new development. Developers continue to propose new housing development projects anticipati ng future improvements in conditions and situation-specific advantages related to project financing, costs, investment goals, and site or project efficiency. For example, developers are pursuing at least five large mid-rise market rate housing projects within the boundaries of Palo Alto’s San Antonio Road Area Plan.
FIGURE 3: CALIFORNIA STATEWIDE COST INFLATION AND SANTA CLARA COUNTY RENT INFLATION, 2011 TO 2025
Source: California Department of General Services, 2025; CoStar, 2025; Strategic Economics, 2025.
4 The analysis presents a simplified example of current versus historic conditions and outcomes for two variables to gauge whether and how the mid-rise development prototype could become financially feasible. As noted earlier in this report, all aspects of development costs, revenues, and returns are, in reality, complexly dynamic and inter-related. -5%
0%
5%
10%
15%
20%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Annual Percent Change
California Construction Costs Santa Clara County Multifamily Rents
Housing Development Economic Feasibility and Implementation Analysis 13 FIGURE 4: CAP RATES AND SALES PRICE PER UNIT FOR MULTIFAMILY RENTAL BUILDINGS (20+ UNITS) SOLD BETWEEN 2014 AND 2025 IN SANTA CLARA COUNTY
Source: CoStar, 2025; Strategic Economics, 2025.
FIGURE 5: RESIDUAL LAND VALUE SENSITIVITY UNDER HISTORIC MARKET CONDITIONS AND REVENUE GROWTH SCENARIOS (PROTOTYPE #5: MID-RISE RESIDENTIAL)
Note: As previously described, developers and landowners have unique investment goals, property holding costs, and other unique conditions that may allow projects that do not meet the typical land cost threshold to still proceed —although any project must generate a competitive return on investment relative to risk.
Source: CoStar, 2025; Strategic Economics, 2025.
MID-RISE HOUSING PERFORMANCE AND OPPORTUNITIES
While the small ownership prototypes currently perform relatively well, these prototypes are likely insufficient to meet the housing needs of downtown Palo Alto due to the prototypes’ high sales prices, creation of small increments of housing, high construction costs, and limited opportunity sites.
Prototypes 1b and 1c, located on a small typical site in downtown Palo Alto, support relatively high residual values . However, developers interviewed for this study noted that these prototypes are challenging to deliver due to the inefficiencies inherent in providing market -required parking and in making efficient use of small sites while meeting safety and circulation needs. Notably, Prototypes 1b 0%
1%
2%
3%
4%
5%
6%
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Cap Rate
Sales Price per Unit
Sales Price per Unit Cap Rates
-$50,000
$0
$50,000
$100,000
$150,000
$200,000
$250,000
0% 5% 10%
Residual Land Values per Unit
Change in Market Rents
Typical Land Values per Unit in
Downtown Palo Alto
Range of Residual Land Values based
on Historic Cap Rates
Residual Land Value under
Approximate 2017-2019 Cap Rates
Residual Land Value under Current
Cap Rates
Housing Development Economic Feasibility and Implementation Analysis 14 and 1c assumed use of tuck -under parking off a rear alley, but most sites in downtown would likely require the more expensive underground parking.
Although the financial feasibility outcomes for the mid -rise housing prototypes are currently largely negative, improving conditions can especially favor these product types due to their concentration of revenue generating space at a property. As noted above, the mid -rise housing prototype can move closer to becoming financially feasible through changes such as increased achievable rents, changing thresholds for returns on investment, and slower increases in construction costs. Mid -rise housing developments are relatively efficient development product s that concentrate a large amount of housing units at a given site—enabling mid-rise developments to become attractive investments under conditions in which each square foot of space provides a return on investment. Larger mid-rise housing products—such as those in Prototypes 2, 3, 4, and 5 —also support production or relatively large increments of housing that can help meet the production goals of the City of Palo Alto.
Mid-rise housing generally achieves better financial feasibility outcomes at relatively large and regularly shaped sites —creating the potential need for developers of these properties to assemble parcels in the Plan Area. As described in the Community Assessment Report for the Downtown Housing Plan, the ideal site for a mid -rise housing development is a rectangular site of at least a half-acre in size. Few sites in downtown Palo Alto fall within this size range, making it likely that developers would prefer to assemble properties to create larger development opportunity sites ; however, lot consolidations have historically been rar e in Palo Alto, underscoring the need for development incentives or other tools to encourage parcel assembly.
INFLUENCE OF OFFICE USES
Based on the financial feasibility analysis of the prototypes, office uses currently outperform residential uses in the Plan Area —although office performance is also constrained by broader development challenges. As shown in Figure 1, Prototype 5 consists of an entirely residential mid-rise podium building while Prototype 4 consists of an office building (with 34,385 square feet of office space rather than the 20,937 square feet that is currently allowed) and a residential building. The prototype floor area ratios (FAR) are 3.91 and 3.56 overall, respectively. The financial feasibility results in Figure 2 show that the entirely residential Prototype 5 only supports a -$76 residual value per square foot of land area, compared to $12 for Prototype 4. Office use supports higher residual land values than the residential use for these prototypes under current conditions, although office products are still unlikely to be financially feasible due to broader weakness in the office market and increased thresholds for required return on investment.
The relatively strong desirability of office uses in the Plan Area creates competitive challenges for housing development. The relatively strong performance of office space in downtown Palo Alto reinforces input from local developers that the area has long been a highly desirable office location that commands exceptionally high rents within the Silicon Valley. This creates a challenge for housing development in that property owners would often prefer to maintain existing high value office uses rather than p ursue redevelopment to include other uses . This is especially true given that the base zoning in downtown Palo Alto only allows a maximum 1.0 base FAR for office space , discouraging developers from redeveloping properties that exceed this FAR under a prior nonconforming use.
The desirability of office space in the Plan Area may also create opportunities that encourage housing development through policies that support office and residential uses . Examples include allowing transfers of office development rights between properties in exchange for housing development or allowing “bonus” office space in exchange for housing development on the same property.
Housing Development Economic Feasibility and Implementation Analysis 15 Office development in downtown Palo Alto may raise other public policy and community concerns.
Examples of these concerns include the potential to exacerbate the City’s already high ratio of jobs to housing, and t he risk of spillover impacts on adjacent neighborhoods from additional automobile traffic and demand for limited on-street parking—especially since minimum parking requirements for new development projects do not apply within one-half mile of the Palo Alto Caltrain station under AB 2097.
PARKING IMPACTS
Parking spaces add substantial costs to housing development. The parking spaces included in the development prototypes serve the housing units. The parking components of these prototypes added $25,000 to $50,000 in additional “hard” costs (labor and materials) per housing unit for Prototypes 1a through 1c, $107,000 to $123,000 per unit for Prototypes 2 and 3, and $17,000 to $34,000 for Prototypes 4 and 5. These varying costs relate to the parkin g format and ratio of spaces to housing units, but demonstrate the high additional costs for providing parking.
Minimum parking requirements (and related in-lieu fee requirements) do not apply in most of the Plan Area, creating flexibility for developers to reduce housing development costs. As noted in the Community Assessment Report for the Downtown Housing Plan, nearly the entire Plan Area falls within a half mile radius of the Caltrain station and is therefore subject to AB 2097. AB 2097 eliminates minimum parking requirements near robust transit service such as the Palo Alto Caltrain station.
Housing developers believe that they must still provide sufficient on -site parking to make their units marketable to potential residents—although proximity to transit and amenities can reduce resident parking demand. Parking ratios can typically be reduced more for rental housing projects than ownership projects. However, developers still typically seek to provide at least 1 to 1.25 spaces per unit, but with the opportunity to reduce ratios below 1.0 in locations with excellent regional transit service (such as blocks immediately adjacent to the Caltrain station) and access to local jobs and amenities.
Expanding opportunities for parking to be provided in an above -ground “podium” format rather than subterranean—can reduce overall construction costs. The cost to provide a parking space increases significantly when built underground versus in an at - or above -grade podium level. D eveloper interviews suggest an approximate hard cost of $40,000 per space in a podium versus $100,000 or more per space below grade (with especially high costs if space constraints result in the need for parking access solely via a vehicle elevator). Parking lifts or stackers can increase efficiency, but the spaces are less desirable for residents and still add $15,000 to $40,000 in additional construction cost per space for the mechanical equipment (which then must be maintained and eventually replaced).
SENSITIVITY TO CITY FEES AND REQUIREMENTS
Strategic Economics analyzed the sensitivity of the financial feasibility outcomes to two sets of requirements directly imposed on housing development by the City of Palo Alto. These analyses complement the preceding findings that discussed financial feasibility outcomes and opportunities related to land uses, housing product types, broader development conditions, competition with office uses, and parking quantity and format.
The sensitivity analysis explored two scenarios to gauge relative improvement of the prototypes’ financial performance. The first scenario examined outcomes if all local affordable housing
Housing Development Economic Feasibility and Implementation Analysis 16 requirements applicable to the housing uses were waived. As originally applied to the prototypes based on City of Palo Alto mandates, these requirements included:
• payment of an affordable housing impact fee for all rental prototypes (1a, 2, 3, 4, 5), • payment of a fractional inclusionary housing in -lieu fee for the small four -unit ownership housing project in Prototype 1b, and
• provision of one inclusionary unit and payment of a fractional in-lieu fee for Prototype 1c.
The second sensitivity analysis scenario examined outcomes if, in addition to the removal of local affordable housing requirements, all other City impact fees and entitlement/permitting fees were also waived (regardless of whether those fees apply to the residential, retail, or office components of the prototypes).
The testing of these scenarios was not intended to directly represent a recommended course of action since the waived requirements support other City of Palo Alto goals. Affordable housing requirements impact where and how the City provides affordable housing and supports the creation of mixed income communities. Impact fees support capital improvements that serve new public infrastructure and facilities associated with housing.
Removal of affordable housing requirements resulted in only minor improvements to the residual values of the development prototypes. The positive financial feasibility impact of removing affordable housing requirements from the development prototypes was relatively minor, as shown in Figure 6.
However, the cost impacts of Palo Alto’s affordable housing requirements can vary depending on the type and magnitude of the requirements. For example, a large gap exists between sales prices for market rate housing units versus affordable housing units. For Prototype 1c, this gap is equivalent to an $800,000 revenue loss due to inclusion of its single affordable housing unit. In contrast, the in-lieu fee payment for the affordable housing unit would be approximately $412,000. This difference partly explains why Prototype 1b, which was assumed to pay an in -lieu fee for its fractional .6 affordable housing unit obligation, outperforms prototype 1c.
Removal of all City fees , in addition to affordable housing requirements , resulted in a substantial increase in the financial feasibility performance of the prototypes. As shown in Figure 6, elimination of all City impact and permitting fees markedly improved the residual value of the development prototypes. This includes Prototype 5, which solely consists of residential use. Removal of the Park Impact Fee resulted in the greatest cost savings for the prototypes, with this fee constituting a quarter to half of total fee costs for all prototypes—except for Prototype 1b in which the affordable housing in- lieu fee is higher than the Park Impact Fee
The City’s affordable housing requirements and other fees are not the main reason the prototypes do not achieve financial feasibility, but the requirements and fees create an additional cost challenge that reduces the likely timing and pace of housing delivery as development conditions improve. Due to the broader challenges for housing development identified earlier, Figure 6 shows that only the small ownership prototypes 1b and 1c are relatively likely to achieve financial feasibility without application of affordable housing requirements and impact fees. However, Figure 6 also shows that the residual values of all prototypes significantly improve without those requirements . Such improvements can better enable housing development by reducing risk for developers and creating further financial incentives for them to pursue new projects.
Housing Development Economic Feasibility and Implementation Analysis 17 FIGURE 6: RESIDUAL LAND VALUES PER SQUARE FOOT FOR EACH PROTOTYPE WITH VARYING AFFORDABLE HOUSING REQUIREMENTS AND FEE LEVEL SCENARIOS
Source: Strategic Economics, 2025.
-$600
-$400
-$200
$0
$200
$400
$600
$800
$1,000
Prototype
1a:
Small
Vertical
Mixed-Use
Apartments
Prototype
1b:
Small
Vertical
Mixed-Use
Condos (4
Unit)
Prototype 1c:
Small
Vertical
Mixed-Use
Condos (8
Unit)
Prototype 2:
Horizontal
Mixed-Use
Apartments
Prototype 3:
Vertical
Mixed-Use
Apartments
Prototype 4:
Horizontal
Mixed-Use
with Higher
Commercial
FAR
Prototype 5:
Mid-rise
Residential
Residual Land Value / Square Foot of Land
Typical Range of Land Values in Downtown
Palo Alto
Residual Land Value (Current Requirements
and Conditions)
Residual Land Value (no Residential
Affordable Housing Requirements/Fees)
Residual Land Value (no Affordable Housing
Requirements/Fees and no Municipal Fees)
Housing Development Economic Feasibility and Implementation Analysis 18 Opportunities for the City of Palo Alto to Support
Housing Production
Based on the pro forma analysis findings, the following conclusions describe opportunities for the City of Palo Alto to better enable housing production in the Downtown Plan Area by improving the financial feasibility of market rate housing projects. These conclusions indicate potential policy changes for further exploration and refinement by the WRT team based on input from City decision makers.
As described throughout this report, actions to better support market rate housing development must enhance financial incentives and reduce risks for developers and property owners in order to encourage their undertaking of new housing development projects —given that new development generally represent s the greatest investment risk and that housing development conditions are unfavorable due to broader regional conditions . Developers and landowners each have their own unique investment goals , property holding costs, and other unique conditions. Developers and landowners also have a wide variety of options for use of property, including selling it, holding it for sale in anticipation of improved conditions, receiving revenue from the existing conditions, or developing the property. Furthermore, current regional conditions—such as high construction materials and labor cost s and elevated interest rates and required return on investment —are unfavorable for housing development. Palo Alto has a range of options to better enable downtown homebuilding in response, from modest adjustments that position housing to move forward when conditions improve, to more proactive measures that could stimulate housing production even under today’s challenging market environment.
Based on the financial feasibility results for the development prototypes, the following opportunities exist to improve the financial feasibility of market rate housing development in the Downtown Housing Plan area to better enable housing production . The suggested opportunities can also potentially be structured in ways that balance improving of financial feasibility with creating incentives for supporting affordable housing contributions.
1. Adjust zoning and land use requirements —including increased height and FAR to support higher density housing—to allow a greater variety of housing product types , provide flexibility in accommodating parking, and increase the opportunity to produce housing under different market cycles: Allowing additional flexibility to increase building height s and FAR, and potentially relaxing other design and use requirements can increase the potential for the Downtown Housing Plan area to produce new housing . For exampl e, these relaxed requirements could enable Downtown Palo Alto to produce a significant quantity of housing in mid-rise housing projects during periods when those products are financially feasible as discussed in this report
13. Increased allowable heights can also reduce construction costs by enabling less expensive above -ground parking options as opposed to the more expensive subterranean parking option15.
2. Create requirements or incentives that link office production with housing production and encourage site assembly: 14Office space in downtown Palo Alto has stronger long -term demand and performs relatively well from a financial feasibility perspective . The City of Palo Alto historically limited office development downtown through imposition of a 1.0 FAR limit (unless using transfers of development rights from other properties) and configuration and location requirements that essentially limit the ability to replace existing office use at a
Housing Development Economic Feasibility and Implementation Analysis 19 property. These limitations create an opportunity to link highly valued office development rights to housing production. Examples include:
o Creating an incentive structure that link s granting of office development rights with production of housing;
o Allowing transfers of office development rights between properties when linked to housing production at the property that “sends” office development rights to a “receiving” property—thereby creating larger and more efficient office development opportunities while potentially freeing housing development sites and encouraging lot consolidation for creating more efficient housing development projects.
o Reducing allowable commercial FAR f rom the current 1.0 in order to reduce competition between office and residential uses or to increase the attractiveness of the incentive concepts described above.
3. Reduce City impact f ees for housing: 15Removal of impact fees significantly improve s the financial feasibility of the development prototypes. However, any waivers or reductions in fees should be weighed against the important role these fees play in funding critical City infrastructure needs. For example, the analysis found that the Park Impact Fee represents a substantial share of total housing development fees. However, the fee provides a critical source of revenue for acquisition of land and improvements for parks in Palo Alto.
4. Consider potential flexibility in ways to meet affordable housing requirements , especially if linked with the other incentives described above: 15Affordable housing requirements reduce the financial feasibility of the development prototypes, although this impact varied depending on whether the prototype was subject to an impact fee, in-lieu fee, or on-site affordable housing requirement. However, these requirements do support the critical affordability needs and goals of Palo Alto. Therefore, greater flexibility to pay fees for ownership housing products (rather than provide on -site affordable housing units) could be considered as a means of reducing the substantial cost impact of the inclusionary requirement . These fees would still generate revenues that the City of Palo Alto can leverage to produce more affordable housing units at deeper levels of affordability in 100% affordable housing projects.
Housing Development Economic Feasibility and Implementation Analysis 20 Appendix: Pro Forma Analysis Assumptions and
Pro Forma Statements
Housing Development Economic Feasibility and Implementation Analysis 21 FIGURE 7: REVENUE AND SUPPORTABLE VALUE CALCULATION AND RESULTS FOR RENTAL PROTOTYPES
Prototype 1a:
Small Vertical Mixed-
Use Apartments
Prototype 2: Horizontal
Mixed-Use Apartments
Prototype 3:
Vertical Mixed-Use
Apartments
Prototype 4: Horizontal
Mixed-Use with Higher
Commercial FAR
Prototype 5: Mid-Rise
Residential
Revenue
Residential
Gross Potential Rent (Market Rate) $506,048 $3,190,752 $3,706,560 $2,604,636 $5,310,360 Less Operating Costs -$151,814 -$957,226 -$1,111,968 -$781,391 -$1,593,108 Less Vacancy -$25,302 -$159,538 -$185,328 -$130,232 -$265,518 Plus Parking Rent $18,000 $97,200 $97,200 $72,000 $72,000 Residential NOI $346,931 $2,171,189 $2,506,464 $1,765,013 $3,523,734
Retail
Gross Potential Rent $170,000 $0 $289,000 $0 $0
Less Operating Costs -$8,500 $0 -$14,450 $0 $0
Less Vacancy -$17,000 $0 -$28,900 $0 $0
Retail NOI $144,500 $0 $245,650 $0 $0
Office
Gross Potential Rent $720,000 $2,508,000 $2,712,000 $4,126,200 $0 Less Operating Costs -$216,000 -$752,400 -$813,600 -$1,237,860 $0 Less Vacancy -$36,000 -$125,400 -$135,600 -$206,310 $0
Office NOI $468,000 $1,630,200 $1,762,800 $2,682,030 $0
Supportable Development Value
Residential
Total Net Operating Income $346,931 $2,171,189 $2,506,464 $1,765,013 $3,523,734 Yield on Cost (Required Return) 6.25% 6.50% 6.50% 6.50% 6.50% Supportable Development Value $5,551,000 $33,403,000 $38,561,000 $27,154,000 $54,211,000
Retail
Total Net Operating Income $144,500 $0 $245,650 $0 $0
Yield on Cost (Required Return) 7.00% 7.00% 7.00% 7.00% 7.00% Supportable Development Value $2,064,000 $0 $3,509,000 $0 $0
Office
Total Net Operating Income $468,000 $1,630,200 $1,762,800 $2,682,030 $0 Yield on Cost (Required Return) 8.50% 8.50% 8.50% 8.50% 8.50% Supportable Development Value $5,506,000 $19,179,000 $20,739,000 $31,553,000 $0 Total Supportable Development Value $13,121,000 $52,582,000 $62,809,000 $58,707,000 $54,211,000 NOI: Net Operating Income
Source: CoStar, 2025; Strategic Economics, 2025
Housing Development Economic Feasibility and Implementation Analysis 22 FIGURE 8: REVENUE AND PROJECT VALUE CALCULATION AND RESULTS FOR OWNERSHIP PROTOTYPES
Prototype 1b:
Small Vertical Mixed-Use
Condos (4 Unit)
Prototype 1c:
Small Vertical Mixed-Use
Condos (8 Unit)
Sales and Rental Revenue
Residential
Gross Sale Value (Market Rate) $9,996,000 $8,746,500
Sale Value (Below Market Rate Units) n/a $438,048
Less Sales and Marketing Costs -$499,800 -$459,227
Residential Value $9,496,200 $8,725,321
Retail
Gross Potential Rent $170,000 $170,000
Less Operating Costs -$8,500 -$8,500
Less Vacancy -$17,000 -$17,000
Retail NOI $144,500 $144,500
Office
Gross Potential Rent $720,000 $720,000
Less Operating Costs -$216,000 -$216,000
Less Vacancy -$36,000 -$36,000
Office NOI $468,000 $468,000
Project Value
Residential
Residential Value $9,496,200 $8,725,321
Commercial
Total Commercial NOI $612,500 $612,500
Blended Commercial Cap Rate 6.75% 6.75%
Commercial Capitalized Value $9,074,074 $9,074,074
Total Project Value $18,570,274 $17,799,395
NOI: Net Operating Income
Source: Costar, 2025; Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 23 FIGURE 9: TOTAL DEVELOPMENT COST RESULTS FOR RENTAL PROTOTYPES
Prototype 1a:
Small Vertical
Mixed-Use
Apartments
Prototype 2:
Horizontal Mixed-
Use Apartments
Prototype 3:
Vertical Mixed-Use
Apartments
Prototype 4: Horizontal
Mixed-Use with Higher
Commercial FAR
Prototype 5: Mid-
rise residential
Estimated Project Cost
Direct Costs
Demolition and Site Work $160,000 $418,750 $418,750 $418,750 $418,750 Building Area $7,208,750 $30,834,750 $34,155,000 $31,551,250 $32,780,000 Parking $200,000 $6,750,000 $6,750,000 $1,600,000 $1,600,000 Tenant Improvements $800,000 $2,090,000 $2,600,000 $3,438,500 $0 Subtotal Direct Costs $8,368,750 $40,093,500 $43,923,750 $37,008,500 $34,798,750
Indirect Costs
Soft Costs $1,087,938 $5,212,155 $5,710,088 $4,811,105 $4,523,838 Impact and Other Fees $1,516,508 $7,615,106 $8,967,606 $8,282,084 $8,477,242 Misc Additional Impact & Permit Fees $251,063 $1,202,805 $1,317,713 $1,110,255 $1,043,963 Developer Overhead $640,970 $2,000,582 $2,174,450 $1,913,233 $1,842,189 Financing $482,354 $2,793,185 $3,035,937 $2,671,230 $2,572,039 Subtotal Indirect and Financing Costs $3,978,832 $18,823,833 $21,205,793 $18,787,907 $18,459,269
Contingency $593,261 $2,806,207 $3,104,680 $2,656,259 $2,534,299 Total Project Cost (Excluding Land) $12,940,844 $61,723,540 $68,234,223 $58,452,666 $55,792,318 Source: Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 24 FIGURE 10: TOTAL DEVELOPMENT COST RESULTS FOR OWNERSHIP PROTOTYPES
Prototype 1b:
Small Vertical Mixed-Use
Condos (4 Unit)
Prototype 1c:
Small Vertical Mixed-Use
Condos (8 Unit)
Estimated Project Cost
Direct Costs
Demolition and Site Work $160,000 $160,000
Building Area $7,282,250 $7,282,250
Parking $200,000 $200,000
Tenant Improvements $800,000 $800,000
Subtotal Direct Costs $8,442,250 $8,442,250
Indirect Costs
Soft Costs $1,097,493 $1,097,493
Impact and Other Fees $1,352,845 $1,437,299
Misc Additional Impact & Permit Fees $253,268 $253,268
Developer Overhead $637,834 $641,212
Financing $492,536 $495,144
Subtotal Indirect and Financing Costs $3,833,975 $3,924,415
Contingency $358,771 $367,684
Total Development Cost (Excluding Land) $12,634,996 $12,734,350 Source: Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 25 FIGURE 11: PRO FORMA FEASIBILITY RESULTS FOR RENTAL PROTOTYPES
Prototype 1a:
Small Vertical
Mixed-Use
Apartments
Prototype 2:
Horizontal
Mixed-Use
Apartments
Prototype 3:
Vertical Mixed-
Use Apartments
Prototype 4:
Horizontal
Mixed-Use with
Higher
Commercial FAR
Prototype 5:
Mid-rise
residential
Residual Land Value
Total Supportable Value $13,121,000 $52,582,000 $62,809,000 $58,707,000 $54,211,000 Total Project Cost (Excluding Land) $12,940,844 $61,723,540 $68,234,223 $58,452,666 $55,792,318 Residual Value $180,156 -$9,141,540 -$5,425,223 $254,334 -$1,581,318 Per Square Foot of Land $22.52 -$436.61 -$259.12 $12.15 -$75.53
Typical Land Costs $4,800,000 $12,562,500 $12,562,500 $12,562,500 $12,562,500 Per Square Foot of Land $600 $600 $600 $600 $600
Residual Value Less Land Costs -$4,619,844 -$21,704,040 -$17,987,723 -$12,308,166 -$14,143,818 Source: Strategic Economics, 2025.
FIGURE 12: PRO FORMA FEASIBILITY RESULTS FOR OWNERSHIP PROTOTYPES
Prototype 1b:
Small Vertical Mixed-Use
Condos (4 Unit)
Prototype 1c:
Small Vertical Mixed-Use
Condos (8 Unit)
Residual Land Value
Total Project Value $18,570,274 $17,799,395
Less Total Project Cost $12,634,996 $12,734,350
Less Required Developer Profit $1,895,249 $1,910,152
Residual Value $4,040,029 $3,154,893
Per Square Foot of Land $505 $394
Typical Land Costs $4,800,000 $4,800,000
Per Square Foot of Land $600 $600
Residual Value Less Land Costs -$759,971 -$1,645,107
Source: Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 26 FIGURE 13: REVENUE ASSUMPTIONS FOR RENTAL PROTOTYPES
Units
Prototype
1a:
Small
Vertical
Mixed-Use
Apartments
Prototype 2:
Horizontal
Mixed-Use
Apartments
Prototype 3:
Vertical
Mixed-Use
Apartments
Prototype
4:
Horizontal
Mixed-Use
with Higher
Commercial
FAR
Prototype
5: Mid-
Rise
residential
Residential
Average rent (Market Rate) per nsf $81 $81 $81 $81 $81
Parking Rent per space $150 $150 $150 $150 $150
Annual Operating Costs % of GSI 30% 30% 30% 30% 30%
Vacancy % of GSI 5% 5% 5% 5% 5%
Retail
Average rent per gsf $85 $85 $85 $85 $85
Annual Operating Costs % of GSI 5% 5% 5% 5% 5%
Vacancy % of GSI 10% 10% 10% 10% 10%
Office
Average rent per gsf $120 $120 $120 $120 $120
Annual Operating Costs % of GSI 30% 30% 30% 30% 30%
Vacancy % of GSI 5% 5% 5% 5% 5%
Profit Margin
Residential Yield on Cost 6.25% 6.50% 6.50% 6.50% 6.50% Retail Yield on Cost 7.00% 7.00% 7.00% 7.00% 7.00%
Office Yield on Cost 8.50% 8.50% 8.50% 8.50% 8.50%
NSF: Net Square Foot
GSI: Gross Scheduled Income
Source: Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 27 FIGURE 14: COST ASSUMPTIONS FOR RENTAL PROTOTYPES
Units
Prototype
1a:
Small
Vertical
Mixed-Use
Apartments
Prototype 2:
Horizontal
Mixed-Use
Apartments
Prototype 3:
Vertical
Mixed-Use
Apartments
Prototype 4:
Horizontal
Mixed-Use
with Higher
Commercial
FAR
Prototype 5:
Mid-Rise
residential
Hard Costs
Demolition and Site Work per sf land $20 $20 $20 $20 $20 Building Area Construction
Retail per gross sf $325 $0 $325 $0 $0
Office per gross sf $450 $450 $450 $450 $0
Residential - Type I/II per gross sf $525 $525 $0 $0 $0 Residential - Type IIIA per gross sf $0 $400 $400 $400 $400 Parking per space
Tuck-Under per space $20,000
Podium per space $40,000 $40,000
Underground per space $125,000 $125,000 $125,000 $125,000 Interior / Tenant
Improvement Allowance per net sf $100 $100 $100 $100 $100
Soft Costs
Arch, Eng & Consulting % of hard costs 5.0% 5.0% 5.0% 5.0% 5.0% Taxes, Insurance, Legal &
Accounting % of hard costs 5.0% 5.0% 5.0% 5.0% 5.0%
Other Soft Costs % of hard costs 3.0% 3.0% 3.0% 3.0% 3.0% Total Soft Costs (Excluding
Fees) % of hard costs 13.0% 13.0% 13.0% 13.0% 13.0%
Misc. Impact and Permit
Fees % of hard costs 3.0% 3.0% 3.0% 3.0% 3.0%
Contingency
% of hard + soft
costs 5.0% 5.0% 5.0% 5.0% 5.0%
Developer Share
Developer Overhead Fee
% of hard + soft
costs 4.0% 3.0% 3.0% 3.0% 3.0%
Target Developer Yield-on-
cost
Residential
% of total dev
cost 6.25% 6.50% 6.50% 6.50% 6.50%
Retail
% of total dev
cost 7.0% 7.0% 7.0% 7.0% 7.0%
Office
% of total dev
cost 8.5% 8.5% 8.5% 8.5% 8.5%
Financing
Amount Financed (Loan-to-
cost)
% of hard + soft
costs 55% 55% 55% 55% 55%
Average outstanding
balance
% of Amt
Financed 55% 55% 55% 55% 55%
Construction Loan Fee
% of Amt
Financed 1.0% 1.0% 1.0% 1.0% 1.0%
Construction Interest
(annual) 7.75% 7.75% 7.75% 7.75% 7.75%
Term Months 12 18 18 18 18
SF: Square Foot
NSF: Net Square Foot
Source: Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 28 FIGURE 15: MUNICIPAL FEE CALCULATIONS FOR RENTAL PROTOTYPES
Prototype 1a:
Small Vertical
Mixed-Use
Apartments
Prototype 2:
Horizontal
Mixed-Use
Apartments
Prototype 3:
Vertical Mixed-
Use Apartments
Prototype 4:
Horizontal
Mixed-Use with
Higher
Commercial
FAR
Prototype 5:
Mid-Rise
Residential
Impact Fees Calculation Units Rate Fee
Non-Residential
General Government Facilities Retail (gsf) $0.97 $1,934 $0 $3,288 $0 $0 Office (gsf) $1.30 $7,806 $27,191 $29,403 $44,735 $0
Public Safety Facilities Retail (gsf) $0.77 $1,534 $0 $2,608 $0 $0 Office (gsf) $1.10 $6,618 $23,053 $24,928 $37,927 $0
Community Center Impact Fees Retail (gsf) $1.53 $3,066 $0 $5,212 $0 $0 Office (gsf) $1.53 $9,198 $32,040 $34,646 $52,712 $0
Library Impact Fee Retail (gsf) $0.91 $1,828 $0 $3,108 $0 $0 Office (gsf) $0.91 $5,484 $19,103 $20,656 $31,428 $0
Park Impact Fee Retail (gsf) $19.84 $39,674 $0 $67,446 $0 $0 Office (gsf) $19.84 $119,022 $414,593 $448,316 $682,095 $0 Housing Impact Fee Retail (gsf) $27.00 $54,000 $0 $91,800 $0 $0 Office (gsf) $80.00 $480,000 $1,672,000 $1,808,000 $2,750,800 $0 School Impact Fee Commercial (gsf) $0.78 $6,240 $16,302 $20,280 $26,820 $0 Residential
Community Center Impact Fee Units $3,867.92 $30,943 $212,736 $243,679 $170,188 $351,981 General Government Facilities Units $1,394.64 $11,157 $76,705 $87,862 $61,364 $126,912 Housing Impact Fee Residential (nsf) $26.00 $162,435 $1,024,192 $1,189,760 $836,056 $1,704,560 Library Impact Fee Units $2,304.49 $18,436 $126,747 $145,183 $101,398 $209,709 Park Impact Fee Units $50,034.40 $400,275 $2,751,892 $3,152,167 $2,201,514 $4,553,130 Public Safety Facilities Units $1,107.96 $8,864 $60,938 $69,801 $48,750 $100,824 School Impact Fee Residential (gsf) $4.79 $35,207 $235,860 $273,988 $192,534 $392,541 Project-Level
Public Art In-Lieu Fee
Construction
Valuation 1% $83,688 $400,935 $439,238 $370,085 $347,988 Traffic Impact Fee
Net new PM peak
hour trip $10,103.99 $29,099 $520,820 $806,238 $673,677 $689,597 Total Fees $1,516,508 $7,615,106 $8,967,606 $8,282,084 $8,477,242 GSF: Gross Square Foot
NSF: Net Square Foot
Note: Permit fees, connection/capacity fees, and other miscellaneous fees are included in general soft cost assumptions.
Note: Fees charged for all applicable square feet; analysis did not include credits for hypothetical pre-existing square feet at the development prototype sites.
Source: City of Palo Alto Fiscal Year Adopted Municipal Fee Schedule, 2025; Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 29 FIGURE 16: REVENUE ASSUMPTIONS FOR OWNERSHIP PROTOTYPES Units
Prototype 1b:
Small Vertical Mixed-
Use Condos (4 Unit)
Prototype 1c:
Small Vertical Mixed-
Use Condos (8 Unit)
Residential
Average Sale Price (Market Rate) per nsf $1,600 $1,600
Average Sale Price (Market Rate) per unit $2,499,000 $1,249,500 Average Sale Price (BMR) per unit n/a $438,048
Sales and Marketing Expense % of GSI 5% 5%
Retail
Average rent per nsf $85 $85
Annual Operating Costs % of GSI 5% 5%
Vacancy % of GSI 10% 10%
Office
Average rent per gsf $120 $120
Annual Operating Costs % of GSI 30% 30%
Vacancy % of GSI 5% 5%
Valuation and Profit Margin
Blended Commercial Cap Rate NOI / project value 6.75% 6.75% Developer Profit Margin % of project cost 15% 15%
NSF: net square foot
GSF: gross square foot
GSI: gross scheduled income
NOI: net operating income
Source: Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 30 FIGURE 17: COST ASSUMPTIONS FOR OWNERSHIP PROTOTYPES
Units
Prototype 1b:
Small Vertical Mixed-
Use Condos (4 Unit)
Prototype 1c:
Small Vertical Mixed-
Use Condos (8 Unit)
Hard Costs
Demolition and Site Work per sf land $20 $20
Building Area Construction
Retail per gross sf $325 $325
Office per gross sf $450 $450
Residential - Type I/II per gross sf $535 $535
Residential - Type IIIA per gross sf
Parking per space
Tuck-Under per space $20,000 $20,000
Underground per space
Interior / Tenant Improvement
Allowance per net sf $100 $100
Soft Costs
Arch, Eng & Consulting % of hard costs 5.0% 5.0%
Taxes, Insurance, Legal & Accounting % of hard costs 5.0% 5.0% Other Soft Costs % of hard costs 3.0% 3.0%
Total Soft Costs (Excluding Fees) % of hard costs 13.0% 13.0%
Misc. Impact and Permit Fees % of hard costs 3.0% 3.0%
Contingency
% of hard + soft
costs 5.0% 5.0%
Developer Share
Developer Overhead Fee
% of hard + soft
costs 4.0% 4.0%
Financing
Amount Financed (Loan-to-cost)
% of hard + soft
costs 55% 55%
Average outstanding balance % of Amt Financed 55% 55%
Construction Loan Fee % of Amt Financed 1.0% 1.0%
Construction Interest (annual) 8.0% 8.0%
Term Months 12 12
SF: square foot
GSF: gross square foot
NSF: net square foot
Source: Strategic Economics, 2025.
Housing Development Economic Feasibility and Implementation Analysis 31 FIGURE 18: MUNICIPAL FEE CALCULATIONS FOR OWNERSHIP PROTOTYPES
Prototype 1b:
Small Vertical Mixed-
Use Condos (4 Unit)
Prototype 1c:
Small Vertical Mixed-
Use Condos (8 Unit)
Impact and In-Lieu Fees Calculation Units Rate Fee
Non-Residential
General Government Facilities Retail (gsf) $0.97 $1,946 $1,946 Office (gsf) $1.30 $7,806 $7,806
Public Safety Facilities Retail (gsf) $0.77 $1,546 $1,546 Office (gsf) $1.10 $6,618 $6,618
Community Center Impact Fees Retail (gsf) $1.53 $3,066 $3,066 Office (gsf) $1.53 $9,198 $9,198
Library Impact Fee Retail (gsf) $0.91 $1,828 $1,828
Office (gsf) $0.91 $5,484 $5,484
Park Impact Fee Retail (gsf) $19.84 $39,674 $39,674
Office (gsf) $19.84 $119,022 $119,022
Housing Impact Fee Retail (gsf) $27.00 $54,000 $54,000
Office (gsf) $80.00 $480,000 $480,000
School Impact Fee Commercial (gsf) $0.78 $6,240 $6,240
Residential
Community Center Impact Fee Units $3,867.92 $15,472 $30,943 General Government Facilities Units $1,394.64 $5,579 $11,157 Housing In-Lieu Fee Residential (gsf) $66.00 $247,401 $82,467 Library Impact Fee Units $2,304.49 $9,218 $18,436
Park Impact Fee Units $50,034.40 $200,138 $400,275
Public Safety Facilities Units $1,107.96 $4,432 $8,864
School Impact Fee Residential (gsf) $4.79 $35,207 $35,207 Project-Level
Public Art Fee
Construction
Value 1.0% $84,423 $84,423
Traffic Impact Fee
Net new PM peak
hour trip $10,103.99 $14,550 $29,099
Total Fees $1,352,845 $1,437,299
GSF: gross square foot
NSF: net square foot
Note: Permit fees, connection/capacity fees, and other miscellaneous fees are included in general soft cost assumptions Note: Fees charged for all applicable square feet; analysis did not include credits for hypothetical pre-existing square feet at the development prototype sites
Source: City of Palo Alto Fiscal Year 2025 Adopted Municipal Fee Schedule, 2025; Strategic Economics, 2025.