The pace of foreign investment in U.S. real estate declined in 1989 for the third year in a row as commercial and residential property values in this country dropped and investor interest shifted to Japan and Europe, according to a report by the National Association of Realtors.

Although the total amount of overseas money flowing into U.S. real estate continued to grow last year, the rate of increase dropped by 16 percent in 1988 from the year before and by 12 percent last year, according to the NAR, which released the report recently at the organization's annual convention.

Foreigners invested a total of $36 billion in American property last year, a 30 percent increase over the 1987 level, with most of the money going into office buildings, shopping centers and industrial properties, the report said.

Now, many investors are looking elsewhere. As Eastern Europe opens up with the end of the Cold War, more "Japanese and European institutional capital" will go into these countries, according to the report.

"The coming unification of European markets in 1992 makes property and development markets in Germany, England, France and Belgium especially attractive to institutional investors seeking quality office properties," the report said.

At the same time, "America's image abroad as a 'safe haven' of investment opportunity" is diminishing as the U.S. budget deficit persists, oil prices keep going up and the "fear of higher inflation, problems in the banking system and a softening real estate market in various areas" persists, the report said.

Japanese companies also are likely to switch their attention to Europe from the United States. In addition to weaker markets here, two other factors are the "recent Japan-bashing" in this country and pressure from the Japanese government to "go softly and quietly in American real estate markets" because of negative U.S. reaction. Many of the objections came when Japanese companies bought such "trophy" buildings as the Rockefeller Center in New York City.

While the foreign investment total of $36 billion is large, "it is a very small portion of the total real estate portfolio of the United States," according to Marc Andrew Louargand of the Center for Real Estate Development at the Massachusetts Institute of Technology. Louargand, who wrote part of the NAR report, said these holdings amounted to only about 10 percent of all foreign investments in the United States, but "the concentration {of ownership} in office buildings tends to give rise to an overestimate of the relative share of foreign holdings."

Altogether, U.S. real estate holdings by overseas companies and individuals made up 1.7 percent of non-farm, nonresidential real estate last year.

Until last year, Britain and several Western European nations together had the largest U.S. real estate holdings. But in 1989, the combined total of $11.3 billion worth of property owned by companies and individuals from these nations fell behind Japan's total investment of more than $14 billion, according to the report. Nearly all of the Japanese purchases were made in the last seven years, with investments increasing by 2,703 percent over that period.

Overseas money also comes into the American mortgage market, financing purchases of commercial and residential property. Much of the money is being loaned to foreign companies and individuals to buy buildings and land in this country, and the mortgage total is about twice the value of property held by foreigners here. Overseas banks buy securities backed by loans on single-family homes and some apartment projects.

"Foreign ownership of real estate is a particularly touchy issue for Americans" because of "complex cultural and emotional ties to the land which spring from our very beginnings," the NAR report said. As a result, Americans often view such ownership "as a permanent loss of control."

Despite this, calls for "isolationist changes in our markets" should be disregarded because "the world is moving toward unity rather than away from it," Louargand said. "Much of the world is ill-housed, including many Americans... . Restricting access to real estate markets means restricting the inflow of capital. Restricting the inflow of capital will slow growth and make it difficult for Americans to better themselves."