I work with many rentals in Palo Alto, both as a property manager and a broker.
In most areas of the city, rents have kept pace with rapidly-increasing prices for residential property. Single family homes are often rented based upon bids rather than advertised rent rates and apartment rents are approaching monthly ownership costs for condos.
The forcast for residential property values is very strong over the next 24 to 48 months due to expanding employment opportunities throughout Silicon Valley. Despite the difficult development process in the City of Palo Alto, builders are still anxious to work in town, mostly on urban infill projects for rentals and re-sale (condos and small lot single family).
See my current Trulia listing - 595 Maybell. This 2.46 acre lot is being sold for residential development and we have multiple offers at or above the $16M listing price (seller to pick an offer this week).
Palo Alto can be an excellent investment target, given the right property and purchase terms.