The Real Estate Operations industry had been making a steady run, post the 2008-2009 financial crisis, as commercial real estate markets enjoyed increased demand, rising absorptions, high occupancy and escalating rents. This was backed by a recovering economy, job-market gains, low-cost credit availability, as well as rising institutional capital inflows toward commercial real estate. Particularly, the slow, yet, steady pace of economic growth and low interest rates provided a decent impetus, assisting the industry to excel.
Nevertheless, things, of late, have been turning sour and the commercial real estate market, both domestic and international, do not appear as prosperous as it used to be. The industry, rather, seems to be entering the late stages of its growth cycle. In fact, after years of witnessing decent growth, commercial real estate transaction volumes have decelerated in the past couple of years. Also, leasing activity is likely to slowdown in the United States after displaying robust pace of growth in earlier part of the current cycle.
While the tax cuts, gain in consumer and business confidence, low unemployment level, robust job creations, high consumption levels and business investment appear favorable for the industry, these also raise the risks of higher inflation.
Specifically, the financial markets’ volatility, along with inflation trends and hike in interest rates, are compelling investors and lenders to adopt a more cautious approach with respect to underwriting, thereby affecting the sales activity. And the Federal Reserve’s latest rate-hike announcement, along with indication for steady increases this December and beyond, doesn’t spell any respite in the near term. Further, oversupply in some of the major metropolitan areas adds to these woes.
Moreover, the uncertainty accompanied with global regulatory policies, particularly that of the U.K. owing to its decision to exit from the European Union, is likely to cast a pall on the commercial real estate market in the region. Additionally, the adverse rippling effect on the economy from escalating trade-war tensions is feared to impede the commercial real estate market's performance, in turn, dampening the Real Estate Operation Industry’s prospects.
Industry Lags in Terms of Shareholder Returns
Shareholders’ returns, over the past year, indicate that the broader economic recovery was inadequate for boosting investors’ confidence in the industry’s growth prospects. Interest-rate movements and regulatory policies have affected the performance of real estate operations stocks in the past quarters.
The Real Estate Operations Industry, which is a group within the broader Zacks Finance Sector, has underperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively gained 0.3%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 16.3% and 2.1%, respectively.
One-Year Price Performance
Valuation Looks Reasonable
For stocks belonging to the Real Estate Operations industry, forward P/E multiple is a common measure for valuation.
Thanks to the underperformance of the industry over the past year, the valuation looks cheap when compared to its median level of the range over this period. The industry currently has a forward P/E ratio of 19.35. When compared with the highest level of 23.35 and median level of 21.22 over the past year, there is some upside left.
However, the space looks expensive when compared with the market at large as the forward P/E ratio for the S&P 500 is 17.44 and the median level is 17.58.
Underperformance May Continue Due to Bleak Earnings Outlook
The domestic economy is gathering steam, and consumer and business confidence are building up as well. Furthermore, occupancy levels remain healthy, and consumer spending continues to be robust amid tax cuts and tighter labor market, which is pushing up wages. Also, despite rate hikes, interest-rate levels are still low and there is decent availability of capital in the market.
But what really matters to investors is whether or not this group has the potential to outshine the broader market in the quarters ahead. In fact, one should really not consider the current price levels as good entry points unless there are convincing reasons to predict a rebound in the near future.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance, moving ahead, is its earnings outlook. Trend in earnings estimate revisions for the constituent companies usually influences their stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.
Price and Consensus: Zacks Real Estate - Operations industry
This becomes even clearer if we focus on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $1.71 EPS estimate for the industry for 2018 is not the actual bottom-up dollar EPS estimate for every company in the Zacks Real Estate - Operations industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the dollar earnings of $1.71 'per share' of the industry for 2018, but how this dollar number has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the $1.71 'EPS' estimate for 2018 is slightly down from $1.72 at the end of August but up from $1.65 at the end of the month prior to that and $1.69 this time last year. Looking at the aggregate EPS estimate revisions, it appears that although analysts were optimistic about this group’s earnings potential over the past year but became conservative in the latest month.
Zacks Industry Rank Indicates Cloudy Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.
The Zacks Real Estate Operations industry currently carries a Zacks Industry Rank #166, which places it at the bottom 35% of more than 250 Zacks industries. 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.
Real Estate Operations Industry Promises Some Long-Term Growth
While the near-term prospects look unwelcoming for investors, when compared with the broader Zacks S&P 500 composite, the long-term (3-5 years) EPS growth estimate for the industry shows some promise. In fact, though the group’s mean estimate of long-term EPS growth rate has declined sharply from the high of 15.01% achieved in March 2018 to the current level of 10.03%, it still compares favorably with 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-terms EPS growth could be the recovery in the top line that real estate operations industry has been showing since the beginning of 2016.
Therefore, considering the maturing cycle, inflation trends and interest-rate issues, together with the evolving regulatory policies and trade tensions, investors should consider a reshuffle of stocks in their portfolio and stay away from some stocks of the said industry that are unlikely to bounce back in the near term.
Here are the stocks to stay away from:
RE/MAX Holdings, Inc. (RMAX - Free Report) : The stock of this Denver, CO-based company has lost 27.3% of its value over the past six months. The consensus earnings estimate moved south for both 2018 and 2019, over the last 90 days. It has a Zacks Rank of 4 (Sell), at present.
Price and Consensus: RMAX
Jones Lang LaSalle Inc. (JLL - Free Report) : The consensus earnings estimate for Chicago, IL-based Jones Lang LaSalle, better known as JLL, has moved 1.1% down for the current year, over the last 60 days. The stock has declined 17.6% over the past six months. Currently, it has a Zacks Rank of 4.
Price and Consensus: JLL
Stocks to Buy
Nevertheless, keeping the long-term expectations in mind, and backed by economic growth, positive momentum from tax overhaul, and healthy consumer and business confidence, investors still have the chance to scoop big gains by keeping some top notch real estate operations stocks that are anticipated to excel over time.
Colliers International Group Inc. (CIGI - Free Report) : The stock of this Toronto, Canada-based real estate-services company has gained 10.2% over the past six months. The Zacks Consensus Estimate for its 2018 earnings per share has been revised 3.9% upward over the last 60 days. It flaunts a Zacks Rank #1 (Strong Buy), currently. (You can see the complete list of today’s Zacks #1 Rank stocks here.)
Price and Consensus: CIGI
CBRE Group, Inc. (CBRE - Free Report) : The 2018 consensus earnings per share estimate for this Los Angeles, CA-based commercial real estate and services firm moved up 1.3% in the last 60 days. Most importantly, the world’s largest commercial real estate services and investment firm will continue benefiting from its global footprint, robust scale and market-share gains. The company is among the few firms that offer a full suite of services to multinational clients. The stock has rallied 2.1% year to date. It has a Zacks Rank of 2 (Buy).
Price and Consensus: CBRE
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