Morning,
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Have you actually seen what health insurance is projected to cost next year? It’s obscene.

A family of four in California will be paying nearly $3,000 a month just in premiums (plus all the out of pocket deductible costs) – more than double this year’s already inflated, subsidized rates.

Something is fundamentally broken in America’s healthcare system when premiums compete with housing costs as the highest household expense - and that's exactly where we're headed.

Indeed, the impact goes far beyond healthcare and is directly tied to housing because if you think rent growth is coming back soon, it’s time to think again.

For a typical family of four in California, the math shows that the capacity to spend on rent is severely constrained and there are structural headwinds rooted in health care cost inflation, not just housing supply.

Let’s walk through the numbers.

According to recent data, the median household income in California is around $95,521 annually. For ease of calculation, let’s use a rounded figure of $100,000 per year, which equates to about $8,350 per month.

Here's what their expenditures will look like if health insurance premiums double from today's average of $1,400/month:

Monthly budget breakdown (approximate):

• Average rent for a 3-bed apartment: $3,600
  → about 43% of monthly income
• Health insurance premiums: $2,850
  → about 34% of monthly income
• Groceries: $1,400
  → about 17% of monthly income
• Utilities: $500
  → about 6% of monthly income

That adds up to 100% of income before taxes, car payments, savings, schooling, telephones, or any discretionary spending. The numbers illustrate how little margin remains for growth, escalation, or upward mobility.

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Why this matters:

1. Purchasing power is constrained.​
   When a family directs around 77% of its gross monthly income to just rent plus health insurance (43% + 34%), there is little left for other expenses. The margin for rent escalation is minimal. Through a real-estate investment lens, this explains why rent growth has stalled and how severely it could be impacted if health insurance subsidies are not preserved (the current shutdown battle in D.C.). Tenants will have even less disposable income than they do now to absorb higher rents.
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2. Health-insurance premiums will eat rent growth​
   If Congress fails to extend existing subsidies, health-insurance premiums for millions of families are set to double or more nationwide next year. This isn’t speculation, it’s baked into the math of how the Affordable Care Act’s tax credits work. Without that federal support, the full cost of coverage shifts back to households overnight, turning a $1,400 monthly plan into nearly $3,000. The fight in Washington isn’t abstract policy, it’s about whether middle-income families can keep their coverage at all and, dare I say it, afford increased rents.
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3. Housing is not isolated.​
   Health-care inflation isn’t just a healthcare problem; it’s a consumer-spending, housing-market, growth-economy problem. If families must allocate more income to health care, less remains for rent, homeownership, or moving up the value chain. For real-estate pros, this means deals struggle where underwriting assumes higher rent growth or higher margins because the tenant pool is already over-levered.

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Implications for investors and operators:

• Stalled rent growth:
  If tenants have squeezed budgets, rent escalations above inflation become less realistic especially in markets where rents already consume high proportions of income.
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• Occupancy risk:
  Tenants facing spiraling non-housing costs may down-size or vacate, increasing vacancy risk for multi-family or mixed-use assets.
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• Capex & underwriting caution:
  Assumptions built on 3-5% annual rent growth may need recalibration. The “nominal” cost base for tenants (housing + health + other essentials) may already exceed typical affordability thresholds.
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• Location & asset-class divergence:
  ​The impact of expiring health-insurance subsidies will vary by state. Markets with lower overall cost burdens or those in states that provide supplemental premium assistance, such as Washington, Massachusetts, or Vermont, may see less pressure on tenant budgets and therefore more room for rent growth. By contrast, high-cost coastal metros in California, New Jersey, and Maryland, where both housing and healthcare premiums are projected to spike the most if federal subsidies lapse, face the greatest affordability risk.
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• Structural supply side caution:
  Even if interest rates fall or supply is constrained, demand may not absorb higher rents if displacement risk hits the tenant base. This dampens one of the key drivers used to predict rent growth in prior cycles.

Why this matters now
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Many narratives assume that lowering interest rates will unlock rent growth or trigger a secondary leasing boom. But what we’re missing is a full income-framework: if renters (or buyers) are already dedicating 100%+ of their income to housing+health+essentials, then there’s no budget left for rent increases. Without income growth or cost relief for these healthcare hikes in particular, the market’s structural dynamic will shift.

In other words, it’s not just that mortgage or cap-rates are high, it’s that consumers’ effective disposable income is eroding. For the commercial real-estate professional focused on underwriting, this means:

(a) revisiting tenant affordability models,

(b) stress testing assets for alternative rent scenarios (flat, modest, or even negative growth), and

(c) consider non-traditional tailwinds (e.g., health-care cost restructure, policy relief) as potential inflection points, not sure bets.

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A simple question:

When families spend 77% of their income just on rent + health insurance, what’s left to fuel rent growth?

This matters because the assumption that “rent will always go up” is baked into many CRE pro formas. If the baseline affordability threshold is already exceeded, rent growth becomes hostage to other variables (like health insurance cost surges) rather than interest‐rate declines or broader macroeconomic winds.
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​Final thoughts:

The takeaway is straightforward: affordability is no longer just about rent levels, it’s about total household expenses. When sourcing deals, evaluate whether residents are already over-levered once health, housing, and other essentials are factored in. A potential doubling of health insurance costs could meaningfully erode tenants’ capacity to absorb rent increases, even in markets that appear stable on paper.

Prudent investors will be cautious with legacy underwriting that assumes a quick return to normalized rent growth. The consumer's cost base has shifted, and tenant spending power is being redefined by non-housing expenses, specifically health insurance premiums, that could rival the cost of housing itself.

Tenant risk is expanding beyond rent collection metrics. Rising healthcare costs can strain payment reliability just as effectively as rising interest rates can strain balance sheets.

Strategically, the current environment favors affordability-resilient markets and product types – workforce housing, manufactured housing, and value-add assets that reduce living costs through energy efficiency or service bundling.

In a cycle defined by a period of household budget contraction, the winners will be those who design housing solutions that make room for everything else in the household budget.

In short: The next leg of rent growth will not occur in a vacuum. It will occur only if income growth exceeds both housing cost growth AND non-housing essential cost growth. In California, and other high-cost states, the burden of health-insurance inflation is a major drag on that equation.

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I've written a shorter version of this newsletter on LinkedIn. If you'd like to join the conversation, please do:
​
​Check out the LinkedIn post here.​

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Hey, I'm not all doom and gloom. Actually, I'm very bullish about the CRE market right now for various reasons and strongly believe now is a good time to buy.

So... if you are a sponsor with a good pipeline and you think the same way as I do about the opportunities we are likely to see in the coming months and you want more equity, let me know.

I might be able to help you raise all the capital you're going to need.

Best,
Adam

This week's Podcast/YouTube show

Guest: Chris Garner, President & CEO, Avanti Residential

The Operating Model Shift

Avanti Residential runs ~8,500 owned multifamily units across seven states and manages another ~2,500 strategically, not as a fee business, but to learn how to scale smaller (80–100 unit) properties efficiently.

The core operational insight: “institutional” size (200+ units) amortizes staffing; anything smaller suffers from per-unit payroll drag.

Avanti’s answer is a hybrid model: fewer full-time staff per site, with multi-property “adults in the room” and a centralized corporate engine handling applications, credit review, delinquency workflows, and leasing process administration.

AI augments the front-end, answering and routing resident interactions that increasingly feel human. The goal isn’t to remove people; it’s to redeploy them where they add the most value, on-property, acting more like hotel concierges than paperwork generalists.
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AI’s Payoff: Revenue Before Expense
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​Asked whether AI is “actually” profitable yet, Garner’s answer is candid: “Quick answers. Not really.” Transition costs are real, and Avanti’s seven-state footprint dilutes regional scale benefits.

Where AI is helping today is top-line: faster turns, quicker delinquency action, tighter leasing cycles; all accretive to NOI over time, even if near-term opex is up during the changeover. The longer-term bet is clear: stick with the learning curve now to be structurally leaner when the market normalizes.

For seasoned operators, that’s the right sequence; revenue resilience first, cost wins later.

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Affordable Meets Market-Rate: Two Lanes, One Platform

Avanti is building an Affordable Housing division alongside its market-rate portfolio. This isn’t “naturally affordable”; it’s capital-A Affordable – LIHTC development with 30-year deed restrictions and all the complexity that implies.
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The new team is already advancing multiple projects (three breaking ground next year) and, in Phoenix, Avanti may be the only player doing both market-rate and LIHTC at scale. Strategically, the dual-lane platform hedges cycle risk, diversifies capital sources, and builds municipal relationships that matter for entitlements, site control, and pipeline visibility.

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Where We Are in the Cycle: Bottoming, With Local Nuance

Nationally, Garner places multifamily “at the bottom of the cycle, if not the beginning of the recovery.” The culprit this cycle is less macro demand destruction and more supply bulges in growth markets (Denver, Phoenix, Miami, Nashville): concessions widened to two months or more in places, pulling forward absorption but compressing effective rents on new leases.

Renewals are flatter; new-lease economics are softer. Expect fundamentals to deteriorate a bit further in heavy-delivery submarkets through next year even as investors begin to “see the light at the end of the tunnel.”Translation: operating data may still feel heavy while forward returns improve – a familiar turning-point pattern.

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Market Selection: Sunbelt Growth, with a Mid-America Counterweight

Avanti’s footprint grew from Denver into Phoenix and Salt Lake City, then post-Covid into Kansas City and South Florida, with Nashville and the Carolinas on deck. The logic is two-pronged: (1) pro-growth, jobs-friendly metros with livability and lighter regulatory overhang; (2) “barbell” capital options for LPs – steadier yield markets (Kansas City) alongside higher-beta growth (South Florida).

Kansas City surprised to the upside: tighter supply additions (half the pace of many growth metros), double-digit rent growth in the immediate post-Covid period, and improving institutional sponsorship closed the bid-ask gap faster than expected.

The Sunbelt remains the long-term priority; the Mid-America anchor dampens volatility.

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Capital Markets: Negative Leverage, Frozen Committees, and Job-Preservation Culture​
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Transaction volumes are down roughly 80% from normal levels; cap rates in many A-class, primary-market trades clung to high-4s even as borrowing costs sat mid-5s – a negative-leverage proposition most disciplined buyers won’t touch. Even with today’s modestly better math (cap rates creeping into low-5s; all-in debt around 5%), investment committees remain cautious.

Garner’s take on timing is blunt, “We’re at the bottom, if not the beginning of the recovery,” he said but the irony is that capital is still sidelined. Investment committees remain cautious, waiting for “clear evidence” that fundamentals have turned, even though the best returns are made before that clarity arrives.

As Garner put it, everyone talks about not following the herd, “but I’ll tell you, everybody’s part of the herd.” When deals do reprice and capital finally moves, the easy money is gone. “That’s when the best deals get missed because you couldn’t raise capital when it was actually the right time to buy.”

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Investment Posture: Buy Quality, Price the Recovery, Lengthen the Hold

Avanti’s current playbook favors newer vintage assets (2000s+) in good physical condition where rent recovery is plausible as supply peaks burn off. The toolkit is pragmatic: tighten management, modest unit refresh, targeted exterior work i.e. “pull 3 or 4 value levers” rather than force a costly interior program residents won’t pay for in a tight economy.

The underwriting bias is conservative: long-term, fixed-rate debt where feasible; lower leverage to ride out noise; value creation through operations, not financial alchemy. In Garner’s words, long-term ownership “is the wealth creator.”

When downturns hit, recovery always takes longer than the optimists think – which is exactly why long-dated capital has the edge at this stage of the cycle.

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What to Watch (and How to Act)

1. Supply inflection:

Track deliveries and lease-up velocity submarket by submarket; the pricing turn starts in the traffic and concessions data before it shows up in trailing rent rolls.

2. Cap rate alignment:

Don’t assume cap rates chase Treasuries one-for-one. If volumes rise, more listings can blunt compression even as debt costs fall. Underwrite a spread that stands on its own.

3. Centralization ROI:

Expect top-line gains first (speed, accuracy, conversion), then opex efficiencies as platforms mature regionally. Budget transition friction.

4. Dual-lane platforms:

Combining market-rate and LIHTC can stabilize pipeline and relationships. The operational muscle you build in one lane (centralized credit, delinquency control) often transfers.

5. Hold periods:

Resist five-year reflexes and look for 10+ year holds. If your capital can extend, agencies and low-LTV fixed structures are your friend. The goal is to avoid selling into trough conditions.

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If you’re a sponsor or investor trying to map the next 12–24 months, this episode gives you an operator’s view of what to do now – not after the committees decide it’s safe.

Tune in for the full conversation with Chris Garner, CEO, Avanti Residential. It’s a masterclass in operating discipline, market selection, and underwriting in today’s world.
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​Watch/listen to full episode here.

​Please join the conversation on LinkedIn, here.​

Or feel free to reply to this email with any thoughts or comments.

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