Top U.S. Real Estate Markets for Investment

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New York has become a particularly attractive spot for those investing in office and apartment buildings.

Rahul Reddy, a dentist from Perth, Australia, has been investing in commercial properties in Western Australia for the last two years. Now, with the Australian dollar growing in strength and the American housing market strained, he's got his eye on residential and commercial properties in Florida and California, areas he believes will recover over the long term.

He's not alone. Encouraged by a weak dollar and a belief in the resiliency of the U.S. economy, individuals like Reddy, along with institutional investors such as pension funds and private equity groups, are seeking investment properties and development opportunities in the United States.

Their markets of choice include New York City, Los Angeles, Washington, D.C., Seattle and San Francisco.

"The U.S. is good for speculative higher-risk investments from our perspective because the strong Australian dollar will enable us to gain hold of properties at prices we will probably not see for a long time," says Reddy. "The U.S. is an economic powerhouse that I think will recover, and if the exchange rate goes back to figures from a few years ago, that will benefit us."

Key word there: Risk. With every passing month, a few pieces of conventional wisdom fall by the wayside. The July news that Manhattan sales prices dipped by 3.1%, according to New York appraisal firm Miller Samuel, pierced the logic that Manhattan holds unique status as a bulletproof market.

Still, international cash is flowing to cities from coast-to-coast as international buyers see plenty of opportunities.

Behind the Numbers

Based on the results of this year's Association of Foreign Investors in Real Estate survey, the U.S. is the top nation for international real estate dollars, even as interest in Asian markets like India and China continues to rise and the U.S. economy slows. AFIRE, a member organization of international investors with $700 billion in cross-border holdings, expects that investment in the U.S. to increase by 16% from last year's $230 billion mark.

New York holds the top spot, but not because of the much celebrated pied-à-terre buyers in Manhattan using the weak dollar to buy into pricey neighborhoods, a trend that has flattened out, says Jonathan Miller, president of Miller Samuel, a New York appraisal firm. Instead, opportunities in office buildings and multi-family residences--whole apartment buildings, not individual units--are the most alluring to overseas investors.

But even with the strong euro and pound, tightness in credit markets has made buying more difficult, an especially problematic hurdle in costly cities like New York and San Francisco.

"Big deals requiring large amounts of structured debt have taken a big hit," says Francois Ortalo-Magne, an associate professor of real estate and urban land economics at the University of Wisconsin Graaskamp Center for Real Estate. "Obviously, there are more such deals in the largest cities than in second-tier American markets."

Still, European buyers particularly see the U.S. as a better value in 2008 than they did last year.

"In 2007, the European investors were looking at the U.S. and were a bit reluctant to make a move because the uncertainty was making them pause," says Karin Shewer, principal of Real Estate Capital Partners, an investment group in New York. "And the dollar, of course, makes a difference. The general sentiment is that the dollar will become stronger in the near term, so people are starting to buy here more opportunistically."

Shewer notes that European and Asian investors favor markets along the coasts, whether that's Boston and New York or Seattle and Los Angeles. While there's still strong interest in cities such as Phoenix and Orlando, Fla., fading local economies hampered by bad mortgages and a slowdown in consumer spending and job growth have lead to decreased foreign investment, according to AFIRE research.

"There's not blood on the streets, but there are pressure points in the marketplace," says Shewer. Even so, she says, "there's a lot of interest from the equity investor in participating."

Top 5 U.S. Real Estate Markets for Investment

1. New York City

2. Washington, D.C.

3. Los Angeles, Calif.

4. San Francisco, Calif.

5. Seattle, Wash.

More top U.S. real estate markets for investment