It’s hard out there for a pessimist. The economic forecasts of late are all sunshine and blue skies, including those presented at our recent conference for apartment owners and developers in San Diego.

Dr. Peter Linneman and others described a fairly rosy outlook for the economy. Many of our panelists and attendees from cities across America echoed that view.

I want to believe them, I really do. But I think there are some very troubling danger signs for our industry, if not our economy as a whole.

First, it’s important to note that the most optimistic voices are from the coasts, the Southeast and the Southwest. In the nation’s industrial heartland, the outlook is not nearly as rosy. Job growth is meager or even negative in some spots. One of our speakers reported that market values for some apartment properties are down to around 50% of indebtedness.

And it’s very hard to ignore the fact that rising home prices, a main driver of the economy, are slowing. In fact, the boom in home-buying may be starting to reverse itself, and the homeownership rate may begin to decline. We have seen a substantial increase in defaults and foreclosures on home mortgages, and in many markets, the inventory of unsold condos is starting to rise and prices are starting to fall.

In Texas, one apartment owner reported seeing “foreclosures [on home loans] like you wouldn’t believe because they got everybody in there by the skin of their teeth.”

Sure, investors still love real estate, and they are even looking at properties in the Rust Belt, I’m told. And it’s true that failed homeowners generally have to come back to the rental market. But the inventory built for sale remains in the stock and will compete with housing built for rent. And negative publicity about declining property values could spill over into the apartment investment market.

In short, it is entirely possible that investors will lose their appetite for apartments and that cap rates will rise substantially.

Now that interest rates are ticking up, deals are on a more precarious footing. In combination with low cap rates, that makes high-leverage creative financing essential to make many deals work.

People are banking on rising rents and occupancy to float all boats, including the deals that otherwise might sink.

While rent increases are likely to be healthy in many markets, they still only tell part of the story. With operating costs rising and local governments imposing more and more fees, some owners could find expenses rising as fast or faster than rents.

Some people like to say that real estate has been repriced compared to other investments, that lower cap rates are here to stay.

One veteran apartment executive dismissed that notion. He said his firm has steadily decreased its acquisition activity because he simply refuses to buy at cap rates of 5% or 6%.

If you assume reasonable rent increases and an increase in cap rates, he noted, you could easily end up holding a property for five years and selling it for exactly what you paid for it.

But he doesn’t have to worry. After selling even his mediocre properties to condo converters for very high prices, he’s ready for retirement.

He won’t have to worry about being the odd man out, a pessimist in the sunny world of the optimists. Nor will he have to worry about the biggest risk of all: the unforeseen event, like another terrorist attack or a default by a major nation on its foreign debt.

What’s your take on the outlook for apartments? Write to me