The Zacks Real Estate Operations industry continues to face persistent hurdles, including high interest rates, macroeconomic uncertainty and geopolitical tensions. Stricter lending norms limit access to credit, increasing borrowing costs and slowing transaction activity. Clients are adopting cautious behavior due to high rates, delaying transactions and seeking thorough price discovery.

Nevertheless, the industry sees growth prospects in the increasing adoption of outsourced real estate services and other emerging trends. Strategic technology investments offer a competitive advantage. Companies like KE Holdings Inc. (BEKE Quick QuoteBEKE - Free Report) and Newmark Group, Inc. (NMRK Quick QuoteNMRK - Free Report) are poised to benefit from these trends despite prevailing challenges.

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 affected 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 expected to continue facing ongoing challenges stemming from various factors, including high interest rates aimed at controlling inflation and uncertainties in the global economy. Persistent macroeconomic uncertainty and geopolitical instability have led to 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 situation, where borrowing becomes scarcer and more expensive, is influencing transaction activities. High interest rates are prompting clients to exercise caution, causing investors to pursue more comprehensive price discovery and consequently leading to prolonged transaction completion times. Also, this is resulting in a decline in average deal size, highlighting the challenges of closing large deals. These factors are playing a substantial role and affecting property sales and leasing activities, ultimately hurting the industry's near-term revenue prospects.

Certain Real Estate Categories’ Demand Hurt: The pandemic has significantly reshaped the use of commercial real estate. Also, economic uncertainty continues to affect real estate leasing markets. While companies are promoting return to office, this transition is gradual, which is hindering tenants’ confidence in long-term commitments. As such, pre-pandemic office occupancy levels are likely to remain elusive in the near or intermediate term. In the case of industrial real estate, though demand is still strong, it but down from record levels experienced in recent years. Also, there is a rise in new construction, which is increasing vacancy levels. 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.  Moreover, continuing inflation is keeping the real estate operations industry players' compensation expenses high as well as pushing up input costs of construction materials for their development businesses.

Outsourcing of Real Estate Needs Gains Momentum: Real estate occupiers, ranging from corporations to public sector entities, healthcare providers and those in finance, industry, life sciences and technology, are increasingly preferring to outsource their real estate needs. They're entrusting third-party real estate experts to enhance execution and efficiency. Organizations are progressively seeking strategic counsel to reimagine their workplaces and workstyles to foster culture, attract talent and improve performance. These developments are creating opportunities for participants in the real estate services domain. Major players in the industry are leveraging this transition, securing new clients and expansion of existing ones. In this industry, companies continue to prioritize investments in technology as it consistently improves efficiency, delivers superior client services and facilitates 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 #175, which places it in the bottom 31% 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.

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 rallied 21% during this period compared with the S&P 500’s growth of 24.8% and the broader Finance sector’s rise of 25.3%.

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 15.14X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.24X. The industry is trading above the Finance sector’s forward 12-month P/E of 15.02X. 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 32.14X and as low as 11.38X, with a median of 17.47X.

2 Real Estate Operation Stocks to Bet

KE Holdings: Based in China, it is a real estate company that provides online and offline platforms for housing transactions and services, ranging from existing and new home sales and home rentals to home renovation and furnishing and other services. BEKE owns and operates Lianjia, which is China’s leading real estate brokerage brand and an integral part of its Beike platform.

KE Holdings is poised to benefit from the effective cost optimization and efforts to raise efficiency levels taken companywide. The expansion of its emerging businesses, an improvement in terms of quality and scale in its home renovation and furnishing services, coupled with strong efficiency gains in its rental services, place the company well to ride the growth curve.

KE Holdings carries a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for the company’s second-quarter 2024 EPS has moved 30.4% north over the past month to 30 cents. The consensus mark for the current-year EPS is pegged at $1.04, backed by a 6.0% projected increase in full-year revenues. Moreover, the consensus mark for 2025 EPS has moved north 3.9% over the past month to $1.32 and implies a 26.6% increase year over year. BEKE shares have rallied 9.9% over the past month. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Newmark Group, Inc.: Headquartered in New York City, Newmark is one of the top commercial real estate services companies that is rapidly expanding its presence globally. Together with its subsidiaries, Newmark Group advises and provides services to large institutional investors, global corporations and other owners and occupiers of commercial real estate.

Newmark is expected to benefit from the acceleration in industry volumes in the second half of the current year. With investments in talent and technology, the company is expected to experience decent performance going forward. It is poised to benefit from the opportunities from the large and highly fragmented market, institutional investor demand for commercial real estate and from the favorable trend toward outsourcing of commercial real estate services.

Newmark Group has a Zacks Rank of 2 at present. The Zacks Consensus Estimate for 2024 EPS has been revised 3.7% upward over the past two months to $1.12. This suggests a 6.7% increase year over year. Moreover, the consensus mark for 2025 EPS has moved north 3.9% over the past two months to $1.34 and indicates a 19.6% increase year over year. The company’s shares have appreciated 3.8% in the past three months.