Real Estate – Development industry is poised to gain from the U.S. government’s robust policy, rising demand for a number of property types, unleashing of pent-up demand and substantial availability of capital for real estate investment. The pandemic-induced behavioral changes of consumers offer scopes to reconsider the optimal usage of real estate. Also, real estate developers striving toward digital transformation at job sites and in the back offices will go a long way in enhancing operational resilience. Stocks including The Howard Hughes Corporation ( HHC Quick Quote HHC - Free Report) , LGI Homes, Inc. ( LGIH Quick Quote LGIH - Free Report) and Green Brick Partners, Inc. ( GRBK Quick Quote GRBK - Free Report) will benefit from this scenario. However, multiple disruptions in the supply chain are resulting in a shortage in construction materials, in turn leading to a rise in material costs. Apart from that, shortage of skilled labor is further aggravating these woes. About the Industry
The Zacks Real Estate – Development industry includes 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?
The values of a number of property types, including industrial and apartment, have been improving with the strengthening economy. In addition, the pace of deterioration in other asset categories has moderated considerably. Furthermore, the government’s robust policy, unleashing of pent-up demand and substantial availability of capital for real estate investment will likely fuel the pace of property price growth, and keep the market buoyant and support development activities. Moreover, the ongoing economic recovery will support demand and asset value appreciation of commercial real estate. This offers ample opportunity to real estate developers to continue undertaking new projects. Additionally, digital transformation efforts to optimize operations will continue being a key focus. Improving Real Estate Market Makes Room for Growth: The real estate developers are well poised to capitalize on consumers’ behavioral changes triggered by the pandemic. The e-commerce boom and supply-chain strategy transformations are spurring demand for industrial spaces. The urban exodus and surge in home buying activities in the sub-urban markets will likely be a multi-year tailwind. Furthermore, demand for retail real estate spaces in high-traffic corridors is improving as retailers who are able to beat the pandemic blues are now eyeing expansion. Although remote working continues to dampen office space demand, flight-to-quality might accelerate development activities in the future. In fact, occupiers are increasingly demanding flexible work spaces and amenities, such as shared meeting spaces, improved indoor air quality and touch-less technologies. Hence, we do not anticipate a reduction in development activities. Evolution of Real Estate Use to Drive Development Activities: The pandemic and the corresponding measures to counter the health crisis are expected to have a lingering impact on the supply chain in the near term. Precisely, multiple disruptions in the supply chain are causing a crunch in construction materials, in turn prompting a rise in material costs. Apart from this, shortage of skilled labor is adding to the woes. These supply-chain issues and tightness in the labor market are resulting in a lengthening of the development cycles in a number of markets, and any respite from the rising input and labor costs is unlikely in the near future. Therefore, sales activity might be moderated amid rising prices and less urgency from buyers. Supply-Chain Woes, High Material Costs & Labor Market Tightness: Zacks Industry Rank Indicates Bright Prospects
The Zacks Real Estate Development industry is housed within the broader Zacks
Finance sector. It carries a Zacks Industry Rank #113, which places it in the top 45% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since September 2020, the industry’s earnings estimates for the current year have been significantly revised upward to $4.22. For 2022, the industry’s earnings estimates have moved 8.4% north to $5.54. 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 Underperforms Sector and S&P 500
The Zacks Real Estate – Development industry has underperformed the S&P 500 composite and the broader Finance sector in the year so far.
The industry has gained 16.5% during this period compared with the S&P 500 composite’s rally of 19.9% and the broader Finance sector’s 18.6%. Year-to-Date 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 5.33X compared with the S&P 500’s 21.48X. The industry is trading below the Finance sector’s forward 12-month P/E of 16.01X.
Over the past five years, the industry has traded as high as 35.29X and as low as 5.33X, with a median of 19.55X. This is shown in the chart below. Forward 12-Month Price-to-Earnings (P/E) Ratio
3 Real Estate Development Stocks Worth Betting On
The Howard Hughes Corporation: The company owns, manages and develops commercial, residential and mixed-use properties throughout the United States. Its assets include portfolio of master planned communities, other operating properties and development opportunities. With its expertise in the real estate sector, the company is well poised to bank on the post-pandemic shifts in the residential and commercial real estate trends. The company carries a Zacks Rank #2 (Buy), at present. The company’s 2021 revenues are projected to be up 25.43%. Moreover, the Zacks Consensus Estimate for 2022 EPS has been revised upward to 29.2% over the past three months to $3.94. LGI Homes, Inc.: The company engages in the design, construction and sale of homes in the United States. It is the 10th largest residential builder in the nation, and has closed more than 50,000 homes over 18 years of homebuilding operations. The ongoing surge in demand for affordable new housing, backed by low mortgage rates, is likely to drive its unit sales in the near term. LGI Homes flaunts a Zacks Rank #1, at present. The Zacks Consensus Estimate for 2021 EPS has been revised 17.3% upward to $17.75 over the past two months. It indicates year-over-year growth of 53.2%. Moreover, the consensus mark for 2021 revenues is pegged at $3.06 billion, suggesting a year-over-year increase of 29.1%. Green Brick Partners, Inc.: This publicly-traded company operates as a homebuilding and land-development provider. The company has been benefiting from the location of its properties in reasonable price-point neighborhoods in the most diversified growth markets across the country. It also benefits by offering a product portfolio that is well diversified across a wide price range, including single family homes, town homes, luxury homes, patio homes and condominiums. It currently carries a Zacks Rank of 2. The consensus mark for 2021 EPS has moved 12.3% north over the past two months to $3.73. This also suggests 66.5% year-over-year growth. Further, it is projected to register revenue growth of 39.2% in 2021.