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2 Real Estate Operations Stocks to Bet On Despite Industry Challenges
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The Zacks Real Estate Operations industry confronts ongoing challenges marked by high interest rates, macroeconomic uncertainties and geopolitical issues. With stricter lending criteria in debt markets, availability is restricted and borrowing costs are raised, affecting transaction activities. Prompted by high interest rates, clients are adopting a cautious behavior, which is delaying transactions as investors seek comprehensive price discovery.
Despite these challenges, the rising trend of outsourcing real estate needs and shifts driven by the pandemic offer growth opportunities for industry participants. Also, strategic investments in technology provide a competitive edge. Companies like Zillow Group, Inc. (Z - Free Report) and FirstService Corporation (FSV - Free Report) are poised to benefit from these developments.
About the Industry
The Zacks Real Estate Operations industry comprises companies that provide leasing, property management, investment management, valuation, development services, facility management, project management, transaction and consulting services, among others. However, real estate investment trusts or REITs are excluded from this group. Economic trends and government policies impact the real estate market (global and regional), which determines the industry’s performance. Economic activity, employment growth, office-based employment, interest-rate levels, costs and availability of credit, tax and regulatory policies and the geopolitical environment are the major factors shaping the real estate market’s fate. Also, pandemic-induced public health challenges and geopolitical issues have impacted property sales and the leasing lines of businesses.
What's Shaping the Real Estate Operations Industry's Future?
High Interest Rates & Macroeconomic Uncertainty Affect the Industry: The industry is anticipated to face ongoing challenges attributed to various factors, such as heightened interest rates aimed at managing inflation, uncertainties in the global economy and a volatile geopolitical landscape. Persistent macroeconomic uncertainty and geopolitical unrest have resulted in an uneven recovery in the global economy. Capital markets have slowed down due to restrictive underwriting assumptions and high debt costs in an elevated interest rate environment. This scenario, where borrowing becomes scarcer and more expensive, is exerting an influence on transaction activities. High interest rates are prompting clients to exercise caution, leading investors to pursue more comprehensive price discovery and consequently resulting in extended transaction completion times. These factors are playing a substantial role in the decrease in sales and leasing activities, ultimately affecting the industry's near-term revenue outlook.
Structural Changes Driven by the Pandemic Continue: The pandemic has significantly reshaped the use of commercial real estate. While companies are promoting office return, this transition is gradual, which is hindering tenants’ confidence in long-term commitments. As such, pre-pandemic office occupancy levels remain elusive. Additionally, the pace of business-related travel and in-person interactions has not fully rebounded to pre-pandemic norms. It is anticipated that operational challenges will persist in the foreseeable future, with clients remaining cautious and potentially causing delays in real estate decision-making in the short term.
Outsourcing of Real Estate Requirements Gains Momentum: Real estate occupiers, including corporations, public sector entities, healthcare providers and those in finance, industrial sectors, life sciences and technology, are increasingly preferring to outsource their real estate requirements. They are placing confidence in third-party real estate experts to boost execution and efficiency. Organizations are progressively seeking strategic guidance to reimagine their workspaces and workstyles to boost culture, attract talent and enhance performance. These trends are generating opportunities for participants in the real estate services sector. Key industry players are capitalizing on this shift, acquiring new clients and expanding existing ones. Within this industry, companies will continue to prioritize investments in technology as it consistently enhances efficiency, provides superior client services and contributes to market share expansion.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Real Estate Operations industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #192, which places it in the bottom 22% 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 dull 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 downward earnings per share outlook for the constituent companies in aggregate. Looking at the aggregate earnings per share estimate revisions, it appears that, of late, analysts are losing confidence in this group’s growth potential. Over the past year, the industry’s earnings per share estimates for 2023 and 2024 have moved 45.7% and 68.5% south, respectively.
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 Underperforms the Sector & the S&P 500
The Zacks Real Estate Operations industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has increased 2.1% during this period compared with the S&P 500’s growth of 19.7% and the broader Finance sector’s rise of 7.9%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-EPS, which is a commonly used multiple for valuing Real Estate Operations stocks, we see that the industry is currently trading at 22.36X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.78X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.59X. This is shown in the chart below.
Forward 12-Month Price-To-Earnings Ratio
Over the last five years, the industry has traded as high as 32.15X and as low as 11.38X, with a median of 17.26X.
2 Real Estate Operation Stocks to Consider
FirstService Corporation: Headquartered in Toronto, Canada, FirstService offers property services to commercial, institutional and residential customers, primarily in North America and internationally.
The company, a leader in essential outsourced property services in North America, serves its customers through two service platforms — FirstService Residential and FirstService Brands. It is poised to benefit from the strong demand for its services. The company is currently focused on investment in key markets, and it recently completed three restoration tuck-under acquisitions. In December 2023, FSV also announced the acquisition of Roofing Corp of America, enhancing its capabilities in property repair, maintenance and restoration.
FirstService sports a Zacks Rank #1 (Strong Buy) at present. The Zacks Consensus Estimate for 2023 earnings per share of $4.70 suggests a 10.85% increase year over year. Moreover, the consensus mark for 2024 EPS has moved north 2.2% over the past month to $5.20 and calls for a 10.7% increase year over year. The company’s shares have rallied 16.3% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Zillow Group: Headquartered in Seattle, WA, Zillow Group offers real estate and home-related brands on mobile and web. The company's brands focus on the home lifecycle, which consists of renting, buying, selling, financing and home improvement. Zillow Group's affiliates, subsidiaries and brands include Zillow, Zillow Premier Agent, Zillow Home Loans, Trulia, Out East, StreetEasy, HotPads, ShowingTime+, Spruce and Follow Up Boss.
Despite the industry headwinds, Zillow is poised to ride the growth curve, backed by its investments in implementing its strategy aimed at boosting both customer transactions and revenue per transaction.
Zillow Group currently carries a Zacks Rank #2 (Buy). While the Zacks Consensus Estimate for 2023 earnings per share has remained unrevised over the past month at $1.25, the same for 2024 has moved up 3.1% over the same time frame to $1.66, reflecting positive sentiments. The company’s shares have increased 34.9% in the past three months.
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2 Real Estate Operations Stocks to Bet On Despite Industry Challenges
The Zacks Real Estate Operations industry confronts ongoing challenges marked by high interest rates, macroeconomic uncertainties and geopolitical issues. With stricter lending criteria in debt markets, availability is restricted and borrowing costs are raised, affecting transaction activities. Prompted by high interest rates, clients are adopting a cautious behavior, which is delaying transactions as investors seek comprehensive price discovery.
Despite these challenges, the rising trend of outsourcing real estate needs and shifts driven by the pandemic offer growth opportunities for industry participants. Also, strategic investments in technology provide a competitive edge. Companies like Zillow Group, Inc. (Z - Free Report) and FirstService Corporation (FSV - Free Report) are poised to benefit from these developments.
About the Industry
The Zacks Real Estate Operations industry comprises companies that provide leasing, property management, investment management, valuation, development services, facility management, project management, transaction and consulting services, among others. However, real estate investment trusts or REITs are excluded from this group. Economic trends and government policies impact the real estate market (global and regional), which determines the industry’s performance. Economic activity, employment growth, office-based employment, interest-rate levels, costs and availability of credit, tax and regulatory policies and the geopolitical environment are the major factors shaping the real estate market’s fate. Also, pandemic-induced public health challenges and geopolitical issues have impacted property sales and the leasing lines of businesses.
What's Shaping the Real Estate Operations Industry's Future?
High Interest Rates & Macroeconomic Uncertainty Affect the Industry: The industry is anticipated to face ongoing challenges attributed to various factors, such as heightened interest rates aimed at managing inflation, uncertainties in the global economy and a volatile geopolitical landscape. Persistent macroeconomic uncertainty and geopolitical unrest have resulted in an uneven recovery in the global economy. Capital markets have slowed down due to restrictive underwriting assumptions and high debt costs in an elevated interest rate environment. This scenario, where borrowing becomes scarcer and more expensive, is exerting an influence on transaction activities. High interest rates are prompting clients to exercise caution, leading investors to pursue more comprehensive price discovery and consequently resulting in extended transaction completion times. These factors are playing a substantial role in the decrease in sales and leasing activities, ultimately affecting the industry's near-term revenue outlook.
Structural Changes Driven by the Pandemic Continue: The pandemic has significantly reshaped the use of commercial real estate. While companies are promoting office return, this transition is gradual, which is hindering tenants’ confidence in long-term commitments. As such, pre-pandemic office occupancy levels remain elusive. Additionally, the pace of business-related travel and in-person interactions has not fully rebounded to pre-pandemic norms. It is anticipated that operational challenges will persist in the foreseeable future, with clients remaining cautious and potentially causing delays in real estate decision-making in the short term.
Outsourcing of Real Estate Requirements Gains Momentum: Real estate occupiers, including corporations, public sector entities, healthcare providers and those in finance, industrial sectors, life sciences and technology, are increasingly preferring to outsource their real estate requirements. They are placing confidence in third-party real estate experts to boost execution and efficiency. Organizations are progressively seeking strategic guidance to reimagine their workspaces and workstyles to boost culture, attract talent and enhance performance. These trends are generating opportunities for participants in the real estate services sector. Key industry players are capitalizing on this shift, acquiring new clients and expanding existing ones. Within this industry, companies will continue to prioritize investments in technology as it consistently enhances efficiency, provides superior client services and contributes to market share expansion.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Real Estate Operations industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #192, which places it in the bottom 22% 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 dull 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 downward earnings per share outlook for the constituent companies in aggregate. Looking at the aggregate earnings per share estimate revisions, it appears that, of late, analysts are losing confidence in this group’s growth potential. Over the past year, the industry’s earnings per share estimates for 2023 and 2024 have moved 45.7% and 68.5% south, respectively.
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 Underperforms the Sector & the S&P 500
The Zacks Real Estate Operations industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has increased 2.1% during this period compared with the S&P 500’s growth of 19.7% and the broader Finance sector’s rise of 7.9%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-EPS, which is a commonly used multiple for valuing Real Estate Operations stocks, we see that the industry is currently trading at 22.36X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.78X. The industry is trading above the Finance sector’s forward 12-month P/E of 14.59X. This is shown in the chart below.
Forward 12-Month Price-To-Earnings Ratio
Over the last five years, the industry has traded as high as 32.15X and as low as 11.38X, with a median of 17.26X.
2 Real Estate Operation Stocks to Consider
FirstService Corporation: Headquartered in Toronto, Canada, FirstService offers property services to commercial, institutional and residential customers, primarily in North America and internationally.
The company, a leader in essential outsourced property services in North America, serves its customers through two service platforms — FirstService Residential and FirstService Brands. It is poised to benefit from the strong demand for its services. The company is currently focused on investment in key markets, and it recently completed three restoration tuck-under acquisitions. In December 2023, FSV also announced the acquisition of Roofing Corp of America, enhancing its capabilities in property repair, maintenance and restoration.
FirstService sports a Zacks Rank #1 (Strong Buy) at present. The Zacks Consensus Estimate for 2023 earnings per share of $4.70 suggests a 10.85% increase year over year. Moreover, the consensus mark for 2024 EPS has moved north 2.2% over the past month to $5.20 and calls for a 10.7% increase year over year. The company’s shares have rallied 16.3% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Zillow Group: Headquartered in Seattle, WA, Zillow Group offers real estate and home-related brands on mobile and web. The company's brands focus on the home lifecycle, which consists of renting, buying, selling, financing and home improvement. Zillow Group's affiliates, subsidiaries and brands include Zillow, Zillow Premier Agent, Zillow Home Loans, Trulia, Out East, StreetEasy, HotPads, ShowingTime+, Spruce and Follow Up Boss.
Despite the industry headwinds, Zillow is poised to ride the growth curve, backed by its investments in implementing its strategy aimed at boosting both customer transactions and revenue per transaction.
Zillow Group currently carries a Zacks Rank #2 (Buy). While the Zacks Consensus Estimate for 2023 earnings per share has remained unrevised over the past month at $1.25, the same for 2024 has moved up 3.1% over the same time frame to $1.66, reflecting positive sentiments. The company’s shares have increased 34.9% in the past three months.