NEW YORK (TheStreet) -- Commercial real estate has turned into a hot asset class and many fear that the market could be forming a bubble. The word "bubble" has broader implications than you may think.
As I recently wrote, the less speculative investments have a margin of safety; the larger the bubble, the greater the opportunity for profit. I see no indication that real estate bubbles (or speculative bets) are forming and the evidence is clear that REITs are outperforming all other sectors and most are undervalued today, when you compare historical relationships with investment-grade and high-yield bonds.
It is also clear that cap rates have compressed considerably. The income valuation metric (net income divided by purchase price) that we call cap rates is nothing more than earnings multiples (or P/FFO) in reverse (P/FFO is the standard earnings valuation metric for REIT investors and analysts).
Maybe instead of forming a "bubble," commercial real estate is simply becoming more aligned with the other fundamental asset classes (equity, fixed income and cash), making the case that real estate is no longer an alternative, but a core wealth creator.
On Thursday, I spoke with Donald Trump. He provided me with some insight into his vast experience in creating huge real estate wealth (Forbes recently listed Trump's net worth at $3.2 billion and No. 139 on Forbes U.S. list of billionaires). It's clear that cap rates across all real estate sectors continue to compress as investors' search for yield in today's low-rate environment. Conversely, investors should consider the supply-and-demand fundamentals and how they impact cap rates. Trump explains: "Today there are numerous sectors in the real estate world. It's important to pick the right sectors. For example, Miami is booming. Not because the U.S. is booming, but because South America is booming." Last year, Trump acquired the Doral Resort & Spa in Miami out of bankruptcy for $150 million. The 800-acre resort complex includes four golf courses, 700 hotel rooms; more than 86,000 square feet of meeting space, featuring a 25,000-square foot ballroom, a 50,000-square foot spa, six food and beverage outlets, and a clubhouse. Trump is under way with a $200 million renovation strategy that is intended to restore the iconic property to its former prestige.
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