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Won't this generate a free fall in house prices in the bay area? Good opportunity for a "big short" move?

Possibly the opposite. If you own a home on a lot that previously you could only build one or two units on, but now you can build N+ units, that lot is worth a lot more.

You should expect rent to fall though, multiple studies (https://www.econstor.eu/bitstream/10419/224569/1/vfs-2020-pi... | https://docs.wixstatic.com/ugd/7fc2bf_ee1737c3c9d4468881bf14...) have shown that increasing rental units lowers rents.

The math of this: a lot with 1 unit, worth $1m today, becomes a lot worth $3m and 10 units on it. So the cost per unit is $300k; unit price goes down, but value for the original land owner goes up.

yea but once anything starts getting actually built prices have to fall, that's sort of the point, and it's not like demand is so high that every house in the Bay Area would need to be replaced by an apartment building.

I mean look at new york the houses are still expensive despite the high rises

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