Flood Capital to Bay Area Apartments. Then Treasury Yields Spiked

A rise in apartment rents in San Francisco and the broader Bay Area is drawing investor interest back to the area, but rising interest rates threaten to derail momentum as multifamily deal activity begins to recover.

After institutional capital flooded into Bay Area real estate during the first half of the year, buyers and lenders say higher Treasury yields have turned the acquisition economy on its toes, dampening transactions in the multifamily sector.

The yield on the 10-year Treasury rose more than 5% earlier this month, the highest level since 2022.

Investors remain attracted by the region’s leading rental growth and limited housing supply, but many deals struck in the past few months are no longer viable as borrowing costs continue to rise, according to panelists at BisnowNorthern California Multifamily Annual Conference.

“The first half of the year, there was a flood of capital to our board,” Nikols Mortgage Fund CEO Carrie Nikols said at the event, which was held at the Parc 55 hotel on October 6.

San Francisco’s multifamily market is the hottest in the country for rent growth, with October rents up 25.7% from a year earlier, Apartment List reported. Across the Bay Area, the multifamily vacancy rate compressed to 3.8% in the third quarter, down 100 basis points year-over-year, while average rental requests rose 7.7% over the same period, researchers at Kidder Mathews noted.

Institutional capital took note and poured into the sector. Recent large transactions include the acquisition of KKR & Co. $346M of 636 units in west San Jose from Greystar and Property Reserve’s $273M purchase of 331 units in Los Altos from BGRE. Property Reserve, the CRE investment arm of the Church of Jesus Christ of Latter-day Saints, notched the highest transaction per door of the year with Los Altos buying at $826K per unit.

The deal comes ahead of a cooler transaction environment, however, with high borrowing costs expected to create multifamily deal flow in the final quarter of the year.

“The first half of the year, everyone was happy to invest in real estate,” said Sack Capital Partners Managing Partner David Feinberg. “The capital is strong.”

Sack Capital closed four multifamily deals in the first six months of 2026 while in a neutral leverage situation, Feinberg said. However, with borrowing costs rising by 50 to 75 basis points following the Fed’s rate hike, deals are now moving as fast as a Bay Bridge traffic jam.

“You’re in a state of negative affect,” Feinberg said. “The Bay Area is one of the few markets that has seen positive rental growth, so the negative effects of borrowing costs have been muted, but we’re having a hard time getting any deals done right now because the cost of capital is relative to the cap rate, the spread is so wide.

Bidding is ongoing because existing doors are still 15% to 20% below the cost of new construction, said John Meany of Presidio Bay Venture’s acquisitions and development team. The area’s rapid rental growth is also finding ways to make deals as it gets its current operating net income from rising rents.

“San Francisco, along with the Peninsula, San Jose and the East Bay, represent three of the four markets with the strongest year-over-year rent growth in the entire nation,” Meany said. “We’re seeing increased desire because it’s the only market in the country where you can attract rental growth.”

The majority of multifamily sales in San Francisco have historically been value additions on older properties, Meany added. However, investors have been attracted to core and core-plus transactions over the past few years, and more deals are expected among stable Class-A multifamily buildings as property owners struggle with maturing real estate loans in a high-interest rate environment.

Affordable housing remains an equally challenging type of product to build throughout Northern California because it sits at the intersection of many different players and stakeholders, and also requires several different funding sources, said Smitha Seshadri, executive vice president of development for Bridge Housing Corp.

Completing the documents required for affordable housing projects is expected to be easier in the coming year through California Assembly Bill 179, which simplifies the application process through a one-stop shop that allows developers to use a single funding application when applying for several revenue streams.

Capital stacks for affordable housing projects in the Golden State typically include between six and nine sources of funding, with each requiring a separate application, Seshadri said.

“You don’t have to apply multiple times, and we hope to speed things up at least in terms of funding,” he said.