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2 Real Estate Development Stocks to Bet on as Industry Rebounds
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The Zacks Real Estate – Development industry constituents are likely to benefit from the revival in demand for commercial real estate in the wake of the pandemic. The pandemic-induced behavioral changes of consumers offer scope to reconsider the optimal usage of real estate. Also, digital transformation at job sites and in back offices has been enhancing operational resilience. Amid this, industry players like Forestar Group Inc. (FOR - Free Report) and Green Brick Partners, Inc. (GRBK - Free Report) are expected to prosper.
Nevertheless, a high-interest rate environment, limited credit availability and multiple disruptions in the supply chain have been adding to the industry’s woes.
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?
Improving Real Estate Market Provides Scope for Growth: Occupiers’ demand has evolved with time, resulting in an increase in demand for properties with modern amenities and mixed-use assets in recent years. Category-wise, the e-commerce boom and supply-chain strategy transformations provided an impetus to the industrial and logistics real estate space. Also, the outmigration of people to the suburbs has been spurring demand for affordable homes. Further, with the waning of pandemic-related concerns, there is a rise in consumers’ preference for in-person shopping experiences. This has accelerated retail real estate demand in high-traffic corridors as retailers eye expansion to satisfy this demand. Per a CBRE Group (CBRE - Free Report) report, in the first quarter of 2023, multifamily was the most preferred commercial real estate sector in the United States with an investment volume of $25 billion, followed by industrial & logistics with $18 billion investment volume and retail with $17 billion investment volume.
Digital Transformation to Drive New-Age Real Estate Developments: The pandemic-induced behavioral changes of consumers have made several real estate developers resort to digital transformation to bring about operational resiliency alongside enhancing customer experience. Some of these features include the installation of smart home technology, building-wide Wi-Fi, AI-enabled sales tool, etc. We anticipate such efforts to drive new-age real estate development activities in the upcoming period.
Macroeconomic Uncertainty & Supply-Chain Woes Linger: Buyer’s sentiments have been dampened to a certain extent amid a high-interest rate environment and macroeconomic uncertainty, causing them to pause or reconsider their buying decisions. This has resulted in a delay in the closing timeline for several transactions. Moreover, many capital sources have tightened their underwriting practices, reducing credit availability. This combination of less credit availability and more expensive debt has affected transaction activities. Per the CBRE report, U.S. commercial real estate investment volume fell 57% year over year in the first quarter of 2023 to $78 billion. With looming macroeconomic uncertainty, commercial real estate investment activity in the near term is likely to remain subdued. Further, to add fuel to the fire, supply-chain disruptions at various stages have been leading to a shortage of construction materials, thereby raising material costs.
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 #69, which places it in the top 27% 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 outperform 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 upward 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. For 2023, the industry’s earnings estimates have moved 6.1% north since January 2023 end.
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 over the past year.
The industry has declined 17.3% during this period compared with the S&P 500 composite’s increase of 2.8%. The broader Finance sector has declined 6.4%.
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 5.29X compared with the S&P 500’s 18.48X. The industry is trading below the Finance sector’s forward 12-month P/E of 12.88X. 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 44.40X and as low as 3.05X, with a median of 14.26X.
2 Real Estate Development Stocks to Buy
Forestar Group Inc.: Forestar Group, a majority-owned subsidiary of D.R. Horton, focuses mainly on investing in land acquisition and development to sell finished single-family residential lots to local, regional and national homebuilders.
Despite the uncertainty in the market, Forestar Group is likely to benefit from its strategic investments in short-duration projects that can be developed in phases. This allows it to complete and sell lots in accordance with market demand. Also, its low net leverage ratio and strong liquidity position act as tailwinds.
FOR currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its 2023 EPS has been revised 45.9% upward to $2.29 over the past two months. The company’s shares have rallied 38.5% in the past three 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 #1 company. The Zacks Consensus Estimate for its 2023 EPS has been revised 53.6% upward over the past month to $5.39. Moreover, the Zacks Consensus Estimate for fiscal 2024 EPS has been raised by 53.1% over the past month. The stock has appreciated 58.1% over the past three months.
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2 Real Estate Development Stocks to Bet on as Industry Rebounds
The Zacks Real Estate – Development industry constituents are likely to benefit from the revival in demand for commercial real estate in the wake of the pandemic. The pandemic-induced behavioral changes of consumers offer scope to reconsider the optimal usage of real estate. Also, digital transformation at job sites and in back offices has been enhancing operational resilience. Amid this, industry players like Forestar Group Inc. (FOR - Free Report) and Green Brick Partners, Inc. (GRBK - Free Report) are expected to prosper.
Nevertheless, a high-interest rate environment, limited credit availability and multiple disruptions in the supply chain have been adding to the industry’s woes.
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?
Improving Real Estate Market Provides Scope for Growth: Occupiers’ demand has evolved with time, resulting in an increase in demand for properties with modern amenities and mixed-use assets in recent years. Category-wise, the e-commerce boom and supply-chain strategy transformations provided an impetus to the industrial and logistics real estate space. Also, the outmigration of people to the suburbs has been spurring demand for affordable homes. Further, with the waning of pandemic-related concerns, there is a rise in consumers’ preference for in-person shopping experiences. This has accelerated retail real estate demand in high-traffic corridors as retailers eye expansion to satisfy this demand. Per a CBRE Group (CBRE - Free Report) report, in the first quarter of 2023, multifamily was the most preferred commercial real estate sector in the United States with an investment volume of $25 billion, followed by industrial & logistics with $18 billion investment volume and retail with $17 billion investment volume.
Digital Transformation to Drive New-Age Real Estate Developments: The pandemic-induced behavioral changes of consumers have made several real estate developers resort to digital transformation to bring about operational resiliency alongside enhancing customer experience. Some of these features include the installation of smart home technology, building-wide Wi-Fi, AI-enabled sales tool, etc. We anticipate such efforts to drive new-age real estate development activities in the upcoming period.
Macroeconomic Uncertainty & Supply-Chain Woes Linger: Buyer’s sentiments have been dampened to a certain extent amid a high-interest rate environment and macroeconomic uncertainty, causing them to pause or reconsider their buying decisions. This has resulted in a delay in the closing timeline for several transactions. Moreover, many capital sources have tightened their underwriting practices, reducing credit availability. This combination of less credit availability and more expensive debt has affected transaction activities. Per the CBRE report, U.S. commercial real estate investment volume fell 57% year over year in the first quarter of 2023 to $78 billion. With looming macroeconomic uncertainty, commercial real estate investment activity in the near term is likely to remain subdued. Further, to add fuel to the fire, supply-chain disruptions at various stages have been leading to a shortage of construction materials, thereby raising material costs.
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 #69, which places it in the top 27% 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 outperform 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 upward 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. For 2023, the industry’s earnings estimates have moved 6.1% north since January 2023 end.
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 over the past year.
The industry has declined 17.3% during this period compared with the S&P 500 composite’s increase of 2.8%. The broader Finance sector has declined 6.4%.
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 5.29X compared with the S&P 500’s 18.48X. The industry is trading below the Finance sector’s forward 12-month P/E of 12.88X. 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 44.40X and as low as 3.05X, with a median of 14.26X.
2 Real Estate Development Stocks to Buy
Forestar Group Inc.: Forestar Group, a majority-owned subsidiary of D.R. Horton, focuses mainly on investing in land acquisition and development to sell finished single-family residential lots to local, regional and national homebuilders.
Despite the uncertainty in the market, Forestar Group is likely to benefit from its strategic investments in short-duration projects that can be developed in phases. This allows it to complete and sell lots in accordance with market demand. Also, its low net leverage ratio and strong liquidity position act as tailwinds.
FOR currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its 2023 EPS has been revised 45.9% upward to $2.29 over the past two months. The company’s shares have rallied 38.5% in the past three months.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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 #1 company. The Zacks Consensus Estimate for its 2023 EPS has been revised 53.6% upward over the past month to $5.39. Moreover, the Zacks Consensus Estimate for fiscal 2024 EPS has been raised by 53.1% over the past month. The stock has appreciated 58.1% over the past three months.