The real estate industry in 1988 will continue its economic downturn of the last two years as developers and investors become more realistic about conditions in the market, according to a forecast released this week.

Developers, owners and investors are going "back to the basics" in real estate transactions, with "realism rather than optimism" characterizing their mood, said John D. Dorchester Jr., president of Real Estate Research Corp. The company, a national consulting firm based in Chicago, compiled the forecast of market conditions in 1988 from interviews with more than 90 prominent real estate experts.

Realism "is particularly unusual ... for a real estate market that has thrived on optimism," Dorchester said.

The return to basics has been caused by "the reality of overbuilding, a sluggish economy, concern about user demand for space, the impact of tax reform and lender conservatism," the report said.

In the view of some industry experts, the decline in construction and prices has been too slow in coming. The continued high rate of construction in 1987 added to the glut of office space and to high vacancy rates in commercial and rental apartment buildings. If the slowdown continues, however, "we hope it will bring the market into equilibrium by 1990," said George R. Puskar, president of Equitable Real Estate Investment Management Inc. His firm, which manages real estate investments for pension funds and foreign investors, commissioned the Real Estate Research study.

The commercial market is still overbuilt in many areas of the country and the stock market's recent plunge "has added some uncertainty to the real estate sector, which has been working its way out of a moderate recession," according to Puskar.

Yields on many real estate investments already are low, and are not expected to rise in 1988, the Real Estate Research report said. Nearly all the experts interviewed said investors will look for deals with "no gimmicks, no inflation, no tax shelters" that produce "real cash flow based on real rents and real tenants." Before the 1986 changes, tax law provided generous benefits that attracted billions of dollars into real estate projects, helping fuel the real estate boom and the oversupply of nearly all types of buildings.

Washington, New York, Los Angeles and Boston were deemed the best cities for real estate investment next year by the experts questioned for the Real Estate Research report. San Francisco was removed from the list of top-rated real estate investment cities this year because of overbuilding in surrounding communities and increasing government restrictions on development in the city, the report said.

Denver, Houston and Dallas remained on the worst-cities list for the third year in a row, and were joined by Miami for the first time. The experts cited crime, drugs and political conflict as the major reasons for considering the Florida city an unhealthy place for real estate investment.

The industry experts were evenly divided on whether investors should buy or sell property in 1988, in contrast to their opinion last year. Slightly more than 90 percent of them thought 1987 would be a good year to buy property.

Prices for "top quality projects characterized by quality design and construction and full occupancy with credit{-worthy} tenants" will increase, but prices for average commercial buildings will drop 10 percent to 15 percent, according to the report. Poor-quality buildings will not sell at all, it said.

Washington will continue to be "recession proof" in 1988, thanks to the federal work force as well as the presence of associations, lobbyists, lawyers and private companies, according to Robert L. Blakeman, senior vice president here for Equitable Real Estate. Although vacancies are high in office buildings, the space still is being filled quickly, he said. Businesses and individuals moved into 13 million square feet of offices in 1986 in the Washington area, and the absorption for 1987 is expected to hit 12 million square feet. But builders and developers added 20 million square feet of space to the metropolitan area's office supply this year, according to Blakeman.

Blakeman predicted that commercial construction in the Washington metropolitan area will drop dramatically next year. The District is expected to experience a 20 percent decline in building, which "should bring the vacancy rate back to single digits," from the current estimated 10 percent to 9 percent, he said.

While construction in Northern Virginia will drop at the same rate as in the District, the vacancy rate will rise to 17 percent from the present 15 percent because of overbuilding in the area, Blakeman predicted.

Building in suburban Maryland is expected to drop by a whopping 88 percent, and the vacancy rate will remain at this year's level, about 10 percent, he said. Blakeman said the causes are overbuilding and "antigrowth sentiment" that has led to curbs on development.

Throughout the country, banks and other lending institutions are becoming more cautious about real estate loans, "requiring market studies as well as appraisals," Dorchester said. They want to know whether there is a demand for the building and they are "looking hard at developers" to determine whether they have good track records and management ability, he said. Banks also are trying to spot the risks in a project and to have developers take on the risks, he added.

The rental apartment market nationwide is growing weaker, chiefly because of last year's construction boom to beat the 1986 tax law changes, depressed conditions in the oil states and a decrease in demand as low interest rates have allowed tenants to buy homes instead of continuing to rent, the report said.

Retail and industrial properties have been good, readily available investments in the past, but this may change in 1988, according to the industry experts. Investors have purchased many regional malls at high prices in the last two years, "which has left fewer opportunities," according to the report.

Many experts expect industrial property to continue to thrive, but the research corporation disagreed, saying returns are down from about 12 percent in 1985 to about 8 percent now, and that high-tech space is "still severely overbuilt in nearly every market."

The experts were nearly unanimous in their belief that hotels will be the least attractive real estate investments next year. About 91,000 new hotel rooms were built in 1986, two or three times the increase in demand, according to the report. Big national chains, however, are continuing to build. "Nationwide occupancies have held up surprisingly well," but not enough to interest the experts, the report said.

Buying and holding land and preparing it for the next construction cycle will be good business next year. "But it requires skill, lots of guts, timing and an understanding of the business cycle" to succeed, Dorchester said.