The prevailing high interest rate environment and tight credit conditions are likely to weigh on the Zacks Real Estate – Development industry constituents’ performance as investors continue to delay the timeline of their transactions, awaiting better price discovery. Also, supply chain constraints, macroeconomic uncertainty and geopolitical unrest are expected to raise material costs, slowing down the pace of new deliveries.
Nevertheless, recovery in demand for certain real-estate property types is likely to provide the industry some support, poising players like LGI Homes (LGIH – Free Report) , Green Brick Partners, Inc. (GRBK – Free Report) and Landsea Homes (LSEA – Free Report) well for growth.
About the Industry
The Zacks Real Estate – Development industry comprises companies that are mainly engaged in owning, developing and managing a variety of real estate properties, including commercial, residential and mixed-use parcels. While some developers undertake construction on their land holdings to eventually sell the properties to homebuilders, retaining the same for conducting operations is also a common practice. Some industry participants actively undertake strategic activities, such as infrastructure improvement, along with land planning and development to boost economic development, attract quality job creators and diversify the regions in which the firms operate. These firms provide real estate leasing, stewardship, underwriting, planning and entitlement services. Real estate development companies are chiefly classified as financial ones, not construction firms.
What’s Shaping the Future of the Real Estate Development Industry?
High Interest Rates Continue to Hurt Business Sentiments: Although the Federal Reserve kept interest rates unchanged in its latest meeting, we notice that buyer sentiment has still not regained its full form owing to the prevalent high interest rate environment. While some investors try to make the best out of the present market conditions, a cautious stance among many continues. This has delayed the closing timeline for several transactions, leading to a fall in deal volumes. In addition, tight credit conditions have been a spoilsport. Per the CBRE Group report, U.S. commercial real estate investment volume fell 54% year over year in the third quarter of 2023 to $82 billion. The report also highlighted that inbound cross-border investment in the quarter slid 55% year over year to $3.4 billion due to the sustained strength of the U.S. dollar and rising interest rates. Given that the present market conditions are likely to persist in the upcoming period, the likelihood of any significant turnaround in commercial real estate investment activity taking place seems dim.
Supply-Chain Woes & High Material Costs Linger: Macroeconomic uncertainty and geopolitical unrest continue to lead to supply-chain constraints at various stages. This, coupled with high interest rates, has pushed up the cost of raw materials, resulting in a slower delivery of new constructions. Moreover, not many buyers are being able to afford new homes at higher prices. Until and unless economic conditions improve at a broader scale, sales activity is likely to remain subdued in the forthcoming period.
Recovery in Demand for Certain Asset-Classes Gives Scope for Growth: While the overall demand for commercial real estate remains low-key, demand for certain asset categories such as residential, industrial and logistics and retail are showing signs of recovery. The residential market demand is reviving with builders trying to build more affordable homes equipped with additional upgrades. At the same time, they are offering incentives to lure buyers. On the other hand, the e-commerce boom and supply-chain strategy transformations have provided an impetus to the industrial and logistics real estate space. Further, the rise in consumers’ preference for in-person shopping experiences post-pandemic has accelerated retail real estate demand in high-traffic corridors as retailers eye expansion to satisfy this demand. We expect this upbeat trend to continue in the upcoming period, poising real estate development players well for growth.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #202, which places it in the bottom 19% of around 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. For 2023, the industry’s earnings estimates have moved 6.4% south since the end of October 2023. The industry’s earnings estimates for 2024 have been lowered 15.8% in the past year.
However, before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Real Estate – Development industry has outperformed the S&P 500 composite and the broader Finance sector over the past year.
The industry has gained 18.1% during this period against the S&P 500 composite’s increase of 10.5%. The broader Finance sector has declined 0.8%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), which is a commonly used multiple for valuing real estate development companies, we see that the industry is currently trading at 3.78X compared with the S&P 500’s 18.6X. The industry is trading below the Finance sector’s forward 12-month P/E of 13.29X. This is shown in the chart below.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Over the past five years, the industry has traded as high as 43.59X and as low as 2.79X, with a median of 10.58X.
3 Real Estate Development Stocks to Consider
Landsea Homes Corporation: This Dallas, TX-based publicly traded residential homebuilder designs and builds best-in-class homes and sustainable master-planned communities in some of the United States’ most desirable markets. LSEA focuses on building affordable homes that reflect modern living in prime locations, which connect buyers seamlessly with their surroundings and enhance the local lifestyle for living, working and playing.
Analysts seem bullish on this Zacks Rank #2 (Buy) company. The Zacks Consensus Estimate for its 2023 EPS has been revised 6.5% upward over the past two months to $1.14. The stock has appreciated 41.9% in the past six months.
Green Brick Partners, Inc.: Green Brick Partners is a publicly traded, diversified homebuilding and land development company operating in Texas, Georgia and Florida. It is engaged in all aspects of the homebuilding process, including land acquisition and development, entitlements, design, construction, marketing and sales for its residential neighborhoods and master-planned communities.
The company specializes in building quality neighborhoods interwoven with the latest technological advancements. GRBK also enjoys several strategic advantages, such as a significant footprint in markets with some of the biggest job growth and best demographics in the United States, superior land and lot pipeline and diversity of its product lines, which bode well for its growth.
Analysts seem bullish on this Zacks Rank #3 (Hold) company. The Zacks Consensus Estimate for its 2023 EPS has been revised 4.6% upward over the past week to $5.39. The stock has appreciated 80.4% in the year-to-date period.
LGI Homes, Inc.: This Woodlands, TX-based company is a pioneer in the homebuilding industry, engaged in the design, construction and sale of homes across 36 markets in 21 states through an innovative and systematic approach. Notably, the company has closed more than 65,000 homes since its founding in 2003.
LGIH’s continued efforts to reduce the cost of homeownership through a combination of mortgage buy-down programs and other sales incentives and the decision to build smaller, lower-priced homes are likely to drive its sales volume in the upcoming period, positioning it well for growth.
Analysts seem bullish on this Zacks Rank #3 company. The Zacks Consensus Estimate for its 2023 EPS has been revised 12.5% upward over the past week to $9.03. The stock has appreciated 17.9% in the year-to-date period.
This article was originally published on this site