The constituents of the Zacks Real Estate – Development industry are expected to encounter difficulties stemming from geopolitical instability and macroeconomic uncertainty. These factors are likely to drive up material expenses and uphold high real estate prices. Sales activity is expected to stay subdued in the near future until there is a recovery in macroeconomic conditions.

However, healthy demand across several real estate property categories, along with a slowdown in the pace of new deliveries, is anticipated to lend support to the industry, thereby placing companies like Howard Hughes Holdings Inc. (HHH Quick QuoteHHH - Free Report) and Landsea Homes Corporation (LSEA Quick QuoteLSEA - Free Report) in a strong position for growth.

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?

Macroeconomic Uncertainty Woes Linger: The ongoing heightened uncertainty surrounding trade policy and government spending is expected to weigh on the industry’s growth in the near term. The tariff polices with other countries are expected to raise the cost of certain imported goods by the second half of this year. This makes investors skeptical about the economy’s outlook. Although the Federal Reserve has reduced interest rates in the second half of 2024, it is expected to make fewer cuts this year due to an anticipated high inflation amid tariff woes and potential policy changes. Amid such an environment, clients are likely to adopt a cautious approach. As a result, investors’ desire for greater price discovery will cause a delay in the closing timeline for transactions.

Geopolitical Instability to Affect the Industry: Geopolitical turmoil is likely to have a significant impact on the industry's performance. Conflicts and wars happening in a number of countries have affected the global economic environment. These situations have escalated supply-chain disruption and increased inflation. Several capital sources are tightening their underwriting practices, reducing credit availability. In the upcoming period, sales activity is likely to stay subdued until macroeconomic conditions improve.

Demand Revival for Certain Asset Classes and Constrained Supply Helps Industry Fundamentals: Demand for certain real estate categories, such as retail, industrial, logistics, and office is witnessing healthy growth. The post-pandemic resurgence in consumers' preference for in-person shopping is propelling retail real estate demand in high-traffic corridors as retailers eye expansion to satisfy this demand. Meanwhile, the e-commerce boom and supply-chain strategy transformations are driving growth in the industrial and logistics real estate space. Moreover, the office REIT companies are noticing an increase in the number of tenants returning to offices or announcing plans to do so. This is likely to support office real estate market fundamentals. However, in addition to raising the price of raw materials, an elevated interest rate environment has also slowed down the pace of new construction deliveries. Particularly, the residential market is experiencing a significant shortage of new homes as a result of more than a decade of under-building in comparison to population growth. The retail real estate market is also going through supply shortages, which is helping the industry fundamentals. Hence, the rebound in demand for certain real estate categories and supply shortage are likely to play a role in maintaining favorable industry fundamentals.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #179, which places it in the bottom 27% of 245 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dim 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 two to one.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the southbound earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. For 2025, the industry’s earnings estimates have moved 39.4% south since June 2024.

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 and the 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 6.8% during this period against the S&P 500 composite’s growth of 12.3%. The broader Finance sector has increased by 22.5%.

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 7.76X compared with the S&P 500’s 22.02X. The industry is also trading below the Finance sector’s forward 12-month P/E of 16.20X. 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 22.09X and as low as 3.77X, with a median of 6.94X.

2 Real Estate Development Stocks to Consider

Landsea Homes Corporation: This Dallas, TX-based publicly traded residential homebuilder designs and builds best-in-class homes and sustainable master-planned communities in some of the United States' most desirable markets. The company has developed homes and communities in New York, Boston, New Jersey, Arizona, Colorado, Florida, Texas and throughout California in Silicon Valley, Los Angeles and Orange County.

Though elevated interest rates have exerted downward pressure on demand nationwide, primarily due to reduced affordability for numerous prospective homebuyers, Landsea Homes is expected to benefit from its efforts to enter new markets, focus on entry-level product offerings and strengthen its brand position through product differentiation.

LSEA currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2025 EPS has remained unchanged at $1.05 over the past two months. The stock has gained 54% in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Howard Hughes Holdings, Inc.: This Woodlands, TX-based company is engaged in the ownership, management and development of commercial, residential and mixed-use real estate throughout the United States. The company operates through three business segments, namely Operating Assets, Master Planned Communities and Strategic Developments.

Its assets include a portfolio of master-planned community assets, buildings and equipment, land and developments. With its expertise in the real estate sector, the company is well-poised to bank on the favorable demand in the residential and commercial real estate markets.

HHH currently has a Zacks Rank #3. The Zacks Consensus Estimate for its 2025 EPS has been raised 55.4% over the past two months to $1.43. The company’s shares have declined 3.2% in the past three months.