San Francisco apartment rents are creeping back to their pre-pandemic highs. National media outlets are abuzz with stories about the city’s artificial intelligence-propelled resurrection. Tourists are returning. Bidding wars are breaking out over some rental units. Institutional investors, both foreign and domestic, are looking to buy office buildings while prices are still less than half their 2019 values.

The newfound bullishness has been contagious, elevating the city’s zeitgeist and bolstering the popularity of Mayor Daniel Lurie.

But there is one key industry unlikely to join the party anytime soon: market rate housing development.

Even with rents surging 11.5% in the past 12 months, developers say that in the best case scenario new multifamily housing development is still 18 months away from starting. And that is only if construction costs and interest rates stay flat, and rents jump an additional 20%. Otherwise equity investors are unlikely to reenter a market they abandoned in droves at the start of the pandemic, according to experts.

“San Francisco is the rent growth darling nationally, which is great, but it started from a pretty low point after COVID so it has a lot of room to grow,” said Keith Manson, vice chair of investment sales for Cushman & Wakefield. “We are still a ways from where we are going to start seeing urban construction happen again.”

While the politicians in Sacramento and San Francisco have been busy lowering fees and removing roadblocks to spur development, the policy changes could take years to translate to tower cranes on the skyline. Real estate development is a slow game — a developer of a 300-unit apartment complex scrambling to find financing now might break ground in early 2027 and hit the market in late early 2029, when Mayor Lurie could be starting a second term.

While several market rate complexes opened on Treasure Island this year, and a 501-unit development at 555 Bryant St., virtually no market rate housing complexes broke ground, which means that no new housing complexes will be delivered in 2027.

“All the multifamily guys are chomping at the bit to start building,” said Terrence Daly, vice chairman with Cushman & Wakefield’s equity debt and structured finance team. “If someone would give them the equity to build they would start. It’s just hard to get equity right now.”

And then you have trepidation about the impact of tariffs on everything from glass to steel to lumber and fears about what mass deportations might do to a workforce that relies on immigrant laborers, according to Ross Edwards, founder and chairman of Build Group, one of California’s biggest contractors.

“If the economy is really going to come back and we are going to get back to building — and building the kind of housing that we need — we need all the workers we have and we need more and we need better,” he said. “The state Legislature and the mayor have been working really hard to streamline construction and get rid of roadblocks from the permitting side, but then you have the immigration side and the tariffs, which are making it really hard to have a comeback here.”

Edwards said Build Group makes sure all of its employees are documented citizens, but many smaller nonunion contractors and subcontractors, which tend to build smaller housing projects, are not as stringent. And the fear of deportation is strong enough that even legal immigrant construction workers are reluctant to relocate for a job.

“We’re all crossing our fingers that all the uncertainty at the federal level doesn’t stifle or otherwise scuttle our rebound here in the city,” said San Francisco Building and Construction Trades Council Secretary-General Rudy Gonzalez. “We haven’t completely turned the corner and the thing that keeps me up at night is what the federal government is going to do or not do.”

With Trump’s tariffs unpredictable — and so few projects under development — it’s tough to gauge their impact on housing development. DM Development was in the process of buying the materials for a 425-unit affordable project at 300 DeHaro St. on Potrero Hill when Trump held his “Liberation Day” news conference. If it had waited another day, the project might not have been able to go forward.

“A lot of what we needed to buy was already on shore so we went in and locked up everything,” he said. “There was a lot of fear and trepidation, but we were able to move fast and take the risk off the table.”

In Sun Valley, Idaho, Build Group was less lucky. There the contractor’s client was hit with an unexpected tariff on steel and aluminum imports from Asia for a resort project. While a $500,000 tax wouldn’t seem like a deal-breaker on a $100 million project, it was still painful.

“It’s going to cost the owner $500,000, and it’s giving him zero benefits. There is no way for us to alleviate it. It’s just whacking him right in the teeth and it’s sad,” Edwards said. “The ability for us to get an equivalent product in the United States could cost $3 million more. The tariffs so far are not driving business back here.”

For the foreseeable future housing development in the Bay Area will be dominated by government-subsidized projects financed by tax credits and affordable housing bonds. Of the 110 housing projects under construction in the Bay Area’s nine counties, 90 are affordable, according to Cushman & Wakefield. Roughly 518 affordable units will wrap up in the second half of 2025, including 160 at 730 Stanyan St. in the Haight. Nearly 900 affordable units will open in 2026 and 2027, including projects in the Sunset, Transbay, Sunnydale and Mission Bay.

For a region and an industry grappling with a shortage of affordable housing the situation is a bit of a conundrum: The Bay Area needs to become more affordable to keep workers, but the cost of housing has to go up for new market rate housing projects to pencil.

Equity investors are looking for a 6.5% return on investment. Unless construction costs and interest rates come down, rents will have to average $5.50 per square foot across a whole building to attract investors. That number is currently achievable for very small units but not for larger apartments, according to Cushman & Wakefield.

“All we are is a conduit for capital,” said Oz Erickson of Emerald Fund, a developer with a 1,600-unit portfolio in San Francisco. “If you can’t produce a 6.5% return, you can’t do a development.”

If equity investors are reluctant to jump back into the market, it’s partially because many of them — union pension funds are the most active group — have lost large sums of money since March 2020. One San Francisco developer, who asked not to be identified to provide proprietary financial information, shared five years of audits for a 400-unit building in the greater downtown area.

The audits show that revenue in the building dropped 37% from January 2020 to January of 2021, from $1.6 million to about $1 million.  The building was losing $500,000 a month during the height of the pandemic, which the developer and its union pension fund equity partners paid for out of pocket to avoid losing the property to its lenders.

Now, nearly six years later, the building’s gross revenue is approaching January 2020 levels, about $1.5 million, but increased operating expenses mean the building still has a negative cash flow of about $1 million a year.

“Rents are going up so we don’t know how much we are going to lose, but we are still going to lose money,” the developer said. “It’s been a rough six years.”

Meanwhile, San Francisco is doing everything it can to make housing easy and fast to build when the market returns — lowering fees and affordability requirements, rezoning transit corridors to allow for taller buildings. A lot of the focus has been on office-to-residential conversions, which are now exempt from most fees and transfer taxes.

“It seems like the city government has does everything it could do, short of investing in multifamily,” Gonzalez said.

The problem is that the value of prime conversions candidates may be rising. The economic forces driving the increase in residential rents — the return to office and the AI boom — are also making office buildings more expensive, Daly said. The $200- or $250-a-square-foot cost basis that makes residential conversions feasible are quickly becoming a thing of the past for optimal buildings in desirable downtown locations.

“That was doable six or 12 months ago, but I don’t know how doable that is going to be six or 12 months from now,” Daly said. “The window is going to close pretty fast on those guys.”

While it may take another year or so, developers and brokers agree that investors “move as a pack,” and at some point San Francisco’s skyline will be punctuated by tower cranes, much like it was in previous booms. “As soon as conditions make sense, all the institutional money will pile in and everything will skyrocket,” said Mark MacDonald of DM Development, who has spent 15 years building market rate housing in Hayes Valley, the Marina and Dogpatch. “Which is why you want to get in early.”