It's no secret that the entire real estate market in the U.S. is suffering. For investors owning REITs, we are in the midst of a year of real pain. For long-term investors, some opportunities have arisen in the REIT space.

With people unable to get mortgages, the rental market has proven to be quite strong. Either from people who sold or forfeited their homes, to people who won't qualify for a mortgage, to higher end buyers who believe prices will continue to fall -- everyone still needs living accommodations. That's why I think the market has it wrong with some of the REIT sectors.

REITs dealing with rental markets should be strong, but, alas, their stock has gotten slammed just as bad as everyone else's. It's a classic case of throwing the baby out with the bathwater.

My top pick in this sector is AvalonBay Communities (NYSE: AVB). AvalonBay develops, acquires, refurbishes, leases, and manages apartment complexes. The stock is down over 40% over the last year and currently sports a nice dividend yield of 3.9%. I think long-term investors will be richly rewarded on this stock.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer has no position long or short in any stock mentioned as of 1/14/08.