Three major reasons are cited for New York's rise to the top of the study's charts, according to Peter F. Korpacz, director of the global strategic real estate research group at PwC. First among the reasons is supply constraints. "There's not a lot of land left to develop," Korpacz says. The New York market is strong now because of its success in the late 1990s, which saw rents rise significantly and generated high occupancy rates.

Needless to say, there is another reason for the change in ranking. The destruction of 13 million sf of Downtown office space on Sept. 11 makes an already supply-constrained market even more heavily weighed toward the demand side, according to the report, further enhancing the strength of the New York market as an attractive investment opportunity in the coming year. "Considerable upside exists in most buildings to write old leases up to market at rollover," the report states.

Pension funds will be a significant player in the real estate market going forward as they look to sell some real estate properties and use the proceeds to buy stocks, the director continues. This will put some pressure on the market, but "there won't be any fire sales." Real estate won't see high levels of foreclosures and bankruptcies because interest rates are low and volatility among ownership should be lessened because of the new disciplines enforced by lenders since the early 1990s, he says.