As if U.S. commercial properties aren’t expensive enough these days, toss this into the growing ring of challenges: capital-drenched foreign investors. From Atlanta shopping malls to trophy office towers in Chicago, offshore investors are gobbling up properties and quashing rival bidders.

The latest example: Dubai's royal family paid more than $1.1 billion for two midtown Manhattan properties last Thursday. The aggressive deal—which included a Park Ave. office tower and an Art Deco hotel along Central Park-- may be the Dubai royals’ initial jump into Manhattan's commercial property market, but it's certainly not their last.

The obvious question is whether foreign buyers are overpaying—as Japanese investors did in the 1980s boom, when they snapped up trophies such as Rockefeller Center. Between 1987 and 1990, Japanese investors snapped up nearly $8 billion of Manhattan real estate—just before the market collapsed. In 1995, with rents faltering and unable to support a $1.3 billion mortgage, Mitsubishi Estate put Rockefeller Center into bankruptcy.

While foreign investors are paying top dollar again today, industry watchers say they don’t see the makings of another meltdown in these deals. Mike Myatt, executive managing director of Pacific Security Capital in Portland, Ore., says an important factor is the time horizon. He points out that Japanese investors who bought at the top in the 1980s were buying at tiny cap rates and expecting to get out with a profit in a few years. This time, he sees more patient institutional money at play. “If investors have the capacity to accept marginal yield now, they will make up for it in appreciation over time,” he says.

At the same time, fundamentals are improving, though hardly in lockstep with the rampant price appreciation over the past few years. According to new projections by Torto Wheaton Research, rent “traction” is returning to the office market. Between 2000 and 2005, rents fell by 2.9% annually. The firm estimates that rents rose 4.3% this year and will rise by 4.4% annually through 2010.

With little new supply expected to hit the market over the next few years, fundamentals should continue to improve at a decent clip. And hiring of office workers, which is critical, has outstripped all other forms of job creation.

According to Manhattan-based real estate research firm Real Capital Analytics, foreign buyers spent $13 billion on U.S. properties in 2004-or nearly double the $7.9 billion total they spent in 2003. The shopping spree is on track to meet or exceed that 2004 total, too: RCA data pegs foreign acquisitions at $10.8 billion through the end of September.

"To foreign investors, U.S. real estate is the safest bet out there," says Bret Wilkerson, chief executive officer at Boston-based real estate consulting firm Property & Portfolio Research. "They can get liquidity in the U.S. and that alone makes the yield more enticing," he says.

To be sure, some foreign investors find the yields on U.S. properties a lot less tempting now. German investors, in particular, tend to follow rigid return guidelines when investing in commercial property. And since many of them are syndicators—Jamestown is one example--their high fees will cut into yields.

"It's much harder for the Germans to win deals nowadays, especially in the low cap markets like New York City," says sales broker Richard Baxter, executive director at Manhattan-based Cushman & Wakefield.

German investment has already slowed. They spent $5.02 billion on commercial property in 2004, but through the end of September had bought only $2.14 billion in assets, putting them $1.5 billion behind the 2004 pace, reports Real Capital Analytics.

Capitalization rates (or the initial yield) on office properties have fallen from roughly 8% to 5% over the past five years, says Baxter. Nor does he see rising interest rates changing that into 2006, since operating fundamentals are improving in most markets.

"Investors see office as a good relative bet, especially in terms of what could go wrong," says Wilkerson of Property & Portfolio Research. "I mean, higher energy prices could hurt retail and hotels are extremely sensitive to terrorism. Office doesn't look so bad when you compare all of these."