Things haven’t been the same in Bay Area multifamily development since Silicon Valley Bank failed.

The market and its projects were obviously in flux before that, suffering from the commercial real estate version of long Covid, but spring 2023 brought with it two major changes in the area’s regional banking landscape that turned out to be watershed moments.

The failure of Silicon Valley Bank and the acquisition of First Republic Bank took away two major sources of capital for local projects, something acutely felt by multifamily developers trying to operate in a high-demand, high-cost environment.

“The finance environment is horrible,” Riaz Capital CEO and founder Riaz Taplin said. “In the old days, you'd call First Republic and that would take two minutes and you'd be done.”

Now, “getting anything financed is a bit of a complicated technical process,” Taplin said at Bisnow’s Annual Multifamily Conference for Northern California on Oct. 16. “The loss of SVB and FRB will be felt forever.”

Taplin said it could take up to two decades for lending market fundamentals to return to a more normal state.

Although First Republic was acquired by JP Morgan and Silicon Valley Bank’s assets were purchased by First Citizens Bank, which then opened a division bearing the same name as the defunct institution, the loss of two major regional lenders hit developers hard.

At the same time, rising interest rates and costs, along with flattening rents, further clamped down on new projects.

​​”We really have had no net effective rent growth,” SummerHill Apartment Communities President and CEO Doug McDonald said during the event at the Hyatt Regency San Francisco. “And land prices have not come down, and hard costs have not really moderated enough over the past three years.”

Those three factors are “critical to getting a new deal off the ground, and that has just not happened yet,” McDonald said.

Rents dropped nominally year-over-year in San Francisco, according to a second-quarter report by Lee & Associates. In Q2 2023, rents fell from $2,875 to $2,856 per month.

“We are still in a negative leverage environment. We are well below replacement costs. So, investors still lost money. The developers still lost money,” said Mike Kim, senior managing director of development at Boca Raton, Florida-based Mill Creek Residential.

While the Fed cut interest rates by half a percent and inflation appears to be easing, multifamily owners and operators have yet to feel any positive impact from that move, and other costs are still on the rise.

The cost of property insurance “is getting worse by the day,” McDonald said.

Many insurers have increased their prices or pulled out of California altogether after several summers of intense wildfires caused billions of dollars in property damage.

An insurance professional at the event, however, said insurance costs aren’t rising because of an increase in wildfires in California. Instead, he blames structural shifts and a hard-to-navigate political landscape.

Landlords should keep an eye on the cost of liability insurance, Heffernan Insurance Brokers Senior Vice President John Vipiana said.

“Liability insurance, specifically in California but more so in the Bay Area, is just brutal right now,” Vipiana said. “You as operators all know you're getting these ridiculous habitability claims that are costing at a minimum six figures.”

Ongoing delays within the state’s department of insurance has also prompted some big insurance companies to stop providing liability policies in California, Vipania said.

Before an insurer can charge a certain rate for a policy, it must inform the state’s department of insurance within 30 days, Vipania said.

“They've been taking more than a year,” he said, which “is causing a mass exodus and needs to be fixed.”

The rising cost of energy is another concern, along with other issues like materials costs, labor shortages and notoriously slow local governments, particularly San Francisco.

But despite the ongoing headwinds, one local executive believes the worst is behind the Bay Area’s multifamily market.

“I think the trough is behind us,” Mosser Cos. Chief Operating Officer Andrew Silverman said. “From an office perspective, you’re starting to see buyers in the market. From a multifamily perspective, you're starting to see buyers in the market.”

Rents haven’t grown in recent years, but they’re not falling, Silverman said.

“I think we’ve achieved a new unstable stability,” he said.