Washington, D.C., traditionally takes a back seat to world cities like London, New York and Tokyo when it comes to real estate investment.

That's likely to change.

Thanks to a proposed $1 trillion wave government spending, investors are flocking to D.C. for opportunities in the commercial and residential real estate markets. All these new programs will need offices, after all, and their employees will need places to live.

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This year, Washington leapfrogged London for the first-place ranking in the world's best cities for real estate investment. But don't count out the world's financial capitals just yet--even with massive financial troubles in London and New York, those cities finished second and third, respectively.

Why? It's the appeal of long-term stability, and fears that emerging countries are going to take a harder hit. While the U.S. property market sputters, China is poised for its worst deflation in a decade, focused heavily on property price declines, according to Deutsche Bank.

"For the U.S. and U.K., part of it is flying back to safety," says Fran?ois Ortalo-Magne, a real estate professor at the Wisconsin School of Business. " For China and India, there's a sense that we went there and tried it, but it wasn't producing."

Behind the Numbers

Forbes' rankings come from the Association of Foreign Investors in Real Estate, a research association that tracks where member investors are finding the best opportunities around the world. AFIRE surveys its 200 members, who collectively hold $700 billion in cross-border real estate.

U.S. cities surged up this year's list: San Francisco moved to sixth from 24th last year; Los Angeles moved to seventh from 19th; Houston moved to eigth from 32nd. Cities in the Asia Pacific region dropped: Sydney fell to 11th from ninth; Hong Kong dropped to 22nd from 10th place.

This year, investors know that valuations can't be trusted. In 2008, the American residential market fell 19%, according to the Case-Shiller index; U.K. prices dropped 16% according to Nationwide, a U.K. builder. Commercial values in both countries have started to soften due to recessions on either side of the pond.

In 2008, investors to spend tried to call the bottom and gambled in emerging markets. This year, they're looking at premium locations in cities with proven track records.

"We don't feel comfortable that we are able to identify what value is," says Richard Kessler, chief operating officer of Benenson Capital Partners, a global real estate investment group. "Having said that, if an opportunity exists on Park and 57th Street, or something we've always wanted to own on Pennsylvania Avenue in D.C., or some other very strategic long-term asset, we would look at it."

That makes 2009 the year of playing it safe and not chasing exotic opportunities in far-flung locations. It's even injected a sense of humility into the investing world.

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"There used to be a rivalry between New York and London," says Kenneth Patton, divisional dean of the New York University Schack Institute of Real Estate. "The subject has shifted to the fact that we're both in the same lifeboat, and maybe it's leaking."

While some investors play it safe, others are content to wait out the real estate downturn entirely.

"Most of the [usual] participants are sitting on the sidelines," says Kessler. "There's a lot of capital, but everyone is uncomfortable about deploying that capital."

For their part, the optimists think 2009 might be the year that sideline money starts to come back into the marketplace--and, especially for the cities on this list, it will come back in a flood, not a trickle.

"There's a lot of money that needs to be invested, says Ortalo-Magne. "The instant people feel an inkling of a turnaround, money is going to flow in."

Whether that inkling comes in 2009 or 2010, however, is an altogether different question.

No. 1: Washington, D.C.

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Commercial and residential real estate often function as different markets, but both need low unemployment and strong job growth to puts money in the pockets of consumers and help businesses to succeed.

At present, D.C. has the lowest unemployment rate in the country--4.1%, compared to the 7.2% national average. With President Obama's stimulus package recommending $1 trillion in new spending, it's unlikely government jobs--and those they support--will be leaving the District anytime soon.

No. 2: London, U.K.

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A pure opportunity market. Home prices in central London continue to decline at a rate of 3.5% per month, according to Knight Frank, while commercial properties have been slipping at 2% per month. The office for market space is particularly overbuilt, according to Knight Frank, and vacancy rates have steadily inched upward.

Even as the country sits firmly in recession, London is a market where investors feel safe making long-term plays and believe they can get reasonable discounts on prices.

No. 3: New York, N.Y.

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The New York residential market, which most termed bulletproof during the general housing downturn, has finally started to slip, with sales volume down by as much as 75% in some neighborhoods, according to Miller Samuel, a Manhattan-based appraisal firm.

According to Cushman Wakefield, a New York-based commercial real estate firm, prices have started to slip in even premium areas like 57th Street or Soho, though this hasn't yet appeared in quarterly reports.

No. 4: Tokyo, Japan

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Japan knows a thing or two about dealing with a real estate collapse. Their "lost decade" of the 1990s came as the result of a speculative real estate bubble.

As a result, Japanese investors largely avoided buying and issuing the subprime products flowing through American and European institutions.

That makes Tokyo a safer bet in terms of determining reasonable valuations, since there are fewer unknowns in the property market.

No. 5: Shanghai, China

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China's growth has slowed from 9% to 7%, and the global slowdown threatens to sink that rate further. According to Deutsche Bank, China is poised for its worst deflation in a decade, driven by property price declines. What makes Shanghai attractive however, is the chance at getting discounted properties in a market that overheated in the last decade.

Unless you believe China won't be important by the time the global economy bounces back, it's difficult to bet against a blue-chip locale like Shanghai, which will likely have a quicker recover cycle than secondary cities like Shenzhen

Click here for the full list of The World's Best Places for Real Estate Buys