With improvement in investor sentiments, demand for commercial real estate has rebounded, allowing the Zacks
Real Estate – Development industry constituents to capitalize on the favorable trend. Moreover, higher demand for flight-to-quality real estate spaces is likely to set ground for new-age real estate developments while digital transformation at job sites and back offices is expected to pave the way for operational resiliency. Amid this, industry players like LGI Homes, Inc. ( LGIH Quick Quote LGIH - Free Report) and Forestar Group Inc. ( FOR Quick Quote FOR - Free Report) should prosper. Nevertheless, cautious investor approach amid a high interest rate environment and limited credit availability are worrisome. Also, increased construction costs are concerning. 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?
The demand for premier real estate properties with class-apart amenities has been trending increasingly among occupiers. With the continuation of a hybrid work setup, the outmigration of people to the suburbs has been spurring demand for affordable homes. Also, the e-commerce boom and supply-chain strategy transformations provided an impetus to the industrial and logistics real estate space. Even though office demand recovery has been sluggish in the United States, demand in key markets continues to outperform. Consequently, there has been a surge in demand for flight-to-quality properties in these areas, creating ample scope for development opportunities. Per a CBRE Group New-Age Real Estate Development Demand to Stir Growth: report, in the second quarter of 2023, multifamily remained the most preferred commercial real estate sector in the United States, with an investment volume of $27 billion. This was followed by industrial & logistics with a $21 billion investment volume and office with a $11 billion investment volume. We expect this upbeat trend to continue in the upcoming period, poising real estate development players well for growth. Several real estate developers at job sites and back offices have resorted to digital transformation due to the pandemic-induced behavioral changes of consumers. Tech-driven features like the installation of smart home technology, building-wide Wi-Fi, AI-enabled sales tool, etc. have brought about operational resiliency by reducing cost. In addition, popular measures like 3D virtual tours have elevated customer experience, driving demand. Hence, in this age of digitization, leveraging technology and organizational capabilities becomes key to keeping up with new-age demand alongside optimizing operations. Digital Transformation to Enhance Operational Resiliency: Although investor sentiment has improved to a certain extent, as they try to make the best out of the present market conditions, a cautious stance among many continues. Several capital sources are tightening their underwriting practices, reducing credit availability. As a result, the volume of commercial real estate transactions remains on the lower side. Per the CBRE report, U.S. commercial real estate investment volume fell 64% year over year in the second quarter of 2023 to $75 billion. With looming macroeconomic uncertainty, any significant turnaround in the near term is unlikely. Further, supply-chain constraints at various stages have led to a shortage of construction materials, thereby raising material costs. This has stalled development activity and resulted in a slower delivery of new constructions. Macroeconomic Uncertainty & Supply-Chain Woes Linger: 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 #26, which places it in the top 11% of nearly 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 14.7% north since August 2022 end. The industry’s earnings estimates for 2024 have been raised 57.1% since March 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 15.1% during this period against the S&P 500 composite’s increase of 4.0%. The broader Finance sector has declined 1.5%. 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 3.07X compared with the S&P 500’s 19.33X. The industry is trading below the Finance sector’s forward 12-month P/E of 13.40X. 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 11.81X.
2 Real Estate Development Stocks to Buy
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 35 markets in 20 states through an innovative and systematic approach. Notably, the company has closed more than 65,000 homes since its founding in 2003. The increase in demand for new-age real estate developments and the company’s continued efforts to reduce the cost of homeownership through a combination of mortgage buy-down programs and other sales incentives are likely to drive its sales volume in the upcoming period. Analysts seem bullish on this Zacks Rank #1 (Strong Buy) company. The Zacks Consensus Estimate for its 2023 EPS has been revised 7.5% upward over the past month to $8.41. Moreover, the Zacks Consensus Estimate for 2024 EPS has been raised 14.5% over the past month. The stock has appreciated 38.6% in the year-to-date period. 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. The Zacks Consensus Estimate for its fiscal 2023 EPS has been revised 23.6% upward to $2.83 over the past month. Also, the Zacks Consensus Estimate for fiscal 2024 EPS has been raised 45.5% over the past month. The company’s shares have rallied 44.1% in the past three months.