Real estate investment trusts have been favorites of income seekers for years. Yet these days, some of the best-known REITs have trailing-12-month dividend yields in the low 3% range:

REIT

Yield

ProLogis (NYSE: PLD)

3.0%

Simon Property Group (NYSE: SPG)

3.1%

Equity Residential (NYSE: EQR)

3.4%

What's the deal with these low yields from the typically high-yielding REIT field? And on the whole, are REITs cheap or expensive right now? I put these questions to Ralph Block, a leading expert on REITs who literally wrote the book on investing in them: The fourth edition of his Investing in REITs is in the works right now. Ralph's a former co-manager of the Undiscovered Managers REIT fund, and has been personally investing in REITs for more than 40 years.

At the end of January, I interviewed Ralph on a variety of REIT-related topics, including the relative cheapness of the REIT space. What follows is an edited portion of our conversation.

Brian Richards: Are REITs cheap or expensive these days?

Ralph Block: I get that question from time to time, and the problem is -- and I wrote about this recently -- the problem is that when you ask that question you're essentially asking two questions: "Are they cheap or expensive relative to other investments that you could make?" or "Are they cheap or expensive in relation to how they've traded in the past [on an absolute basis]?"

And the problem is particularly acute right now because we have a period with practically zero interest rates for CDs and money market funds are almost zero, and you have inflation, people talking about it going up. Maybe it will, but right now and for the near term it's probably going to be 1% or less.

And so as a result you have to look at REITs as the kind of return you can expect on them versus other asset classes. So when I go through this exercise I say, "What can I get on bonds?" With investment-grade bonds I can get maybe 4% or 5%. If I buy common stocks, say the S&P 500 Index (NYSE: SPY), I think earnings growth is going to definitely slow. I think this current quarter is probably going to be the best comp we're going to have. Maybe we get 5% earnings growth over the next year or two and maybe a 2% yield on the S&P. I think the S&P return is going to be about 7% a year.

And then I look at REITs and I say, "What can we expect from them?" Well, if you look at their current cash flows and see how they're valued, you're essentially getting an implied cap rate, or in other words an initial return on REITs based on their cash flows, of 6.5%, and let's just tack on another 1% for growth, being conservative. I think you can get 7.5%, maybe even 8% total returns on REITs, of which about half will come from the dividend.

So when I compare REITs to bonds to S&P stocks, I think they're probably fairly valued. But if you look at them on an absolute basis, I've seen this on the board -- people asking, "What's with these REIT yields? 3.6%? You know, that's chump change. We used to get 6% and 7%." That's true, but we're in a very different world right now with very little inflation, very low interest rates.

If we can get capital appreciation on REIT stocks of maybe 3% to 4% -- and I think we can do that because we're in the early phases of an up cycle in commercial real estate -- and you tack on the dividend yield, I think we can get 7%, 7.5%. So the bottom line is I think REITs are fairly valued today -- not expensive and not cheap.

Read up for more of Ralph's thoughts on REITs:

Fool.com Managing Editor Brian Richards doesn't own shares of any of the companies mentioned in this story. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.