Although it has been as hot as the residential market is cool, commercial real estate will slow next year, experts say.

Those experts -- gathered by the Urban Land Institute for their 2008 Emerging Trends report -- predicted that this "healthy correction” would likely bypass long-term investors but penalize late-to-the-game speculators and overleveraged buyers.

Investors and developers surveyed by ULI believe that uncertainty will characterize 2008. They expect capitalization rates to rise and risk to be repriced, with the harshest effects being felt by those who have relied on debt strategies.

More than three-quarters anticipate stricter underwriting standards next year. Despite this, however, these experts expect most real estate investments to outperform both the U.S. stock and bond returns in the year ahead, and are counting on ample capital sources to cushion the property markets.

They also believe that this correction in the commercial market will not be as severe as in residential real estate. Commercial real estate supply and demand is relatively strong, development is in check and the fundamentals are still healthy.

"The commercial real estate market has been going full throttle for several years with easy money and low interest rates that drove some sectors into questionable lending practices and highly leveraged spending,” said Tim Conlon, partner and U.S. real estate practice leader at PricewaterhouseCoopers, which conducted the survey with ULI.

"But the run went on too long for some participants. Those who went beyond moderation will likely experience some headaches in 2008,” he said. "Depending on what happens with the U.S. economy as a whole, it could be painful for some, but overall, a correction could be good for the industry, keeping supply and demand in balance, curbing overdevelopment and flushing out low-quality investors.”

"By the same token,” according to Colton, "there are still investment opportunities and there is still a good deal of demand from investors."

Richard Rosan, president of ULI Worldwide, said the report points to the value of sustainable building.

"We are seeing an increasing emphasis on building efficiently to accommodate growth -- on pedestrian-friendly, mixed-use development, communities that provide housing near jobs, and development connected to transit,” he said. "What is selling now and will continue to sell are projects that cater to strong consumer desire for convenience. Those are the best bets.”

The top markets to watch, according to the report, are those that have positioned themselves as 24-hour cities with a global pathway to international markets. They all have a major international airport and/or shipping port, export-import hubs, an educated workforce and walkable residential neighborhoods.

These are cities that have revitalized their downtowns areas or large, urbanized suburban towns that have become magnets for corporate headquarters, "business elites, the best and the brightest of the workforce as well as the largest share of investor dollars,” the report stated.

The most successful investment opportunities are in markets on both coasts, reinforcing the real estate truism that it's all about location, location, location.

"But as many interior cities such as Denver have demonstrated, it is possible to transform a city into a 24-hour global pathway city with master planning around infrastructure, transportation and economic development,” the report stated.

The report ranks New York City "the hottest commercial real estate market in the country," and the "ultimate American 24-hour city."

"Vacancies in New York are in the mid-single digits, rents have skyrocketed and pricing is at all-time highs," it said.

Not only is the New York market hot, but the entire commercial real estate industry has also acquired a "New York state of mind," as Wall Street and real estate have converged. Partly because of its size, New York now sets the tone for the entire U.S. commercial real estate market and influences investor psychology as the bellwether for the rest of the country.

Real estate used to be characterized by local buyers and local lenders, but is now dominated by national financial institutions and landlords -- many in New York.

Seattle is also a standout market for investors, receiving top or near top "buy" ratings for all property sectors. Growth controls and geographic barriers have led to concentrated high-density, mixed-use development, which has drawn residents to new downtown neighborhoods, making Seattle a 24-hour city on Asian commerce routes.

With so many "corporate heavyweights" headquartered in or near Seattle, it has a highly diversified economy. Seattle is also the highest-rated metro area for home building.

Other top markets include Boston and Washington, while on the West Coast, Seattle, San Francisco, Los Angeles and San Diego top the list.

Denver is the lone non-coastal metropolitan area among the top markets to watch.

While investors typically back away from smaller markets during a correction, markets to watch in this segment include: San Jose, Calif.; Honolulu, Hawaii; Austin, Texas; Raleigh-Durham and Charlotte, N.C.; Portland, Ore.; Sacramento, Calif.; Las Vegas, N.V.; Orlando and Tampa, Fla; Salt Lake City, Utah, Jacksonville, Fla.; Nashville, Tenn.; and Minneapolis, Minn.

Among property sectors, income-generating industrial and apartment sectors remain favored investment categories, according to the survey. Office space in dominant downtowns should perform better than in suburban-oriented markets.

As tapped-out consumers restrain their spending, ratings may fall most dramatically for housing-related categories, with condominiums landing in the basement.