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Near-Term Outlook Bleak for Real Estate Operation Stocks

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The Zacks Real Estate Operations industry includes companies that offer leasing, property management, investment management, valuation, development services, facilities management, project management, transaction and consulting services, among others. However, real estate investment trusts (REITs) are excluded from this group.

Performance of this industry depends on economic trends, government policies, as well as the global and regional real estate markets. Overall economic activity and employment growth, interest-rate levels and changes in interest rates, the cost and availability of credit, tax and regulatory policies, as well as the geopolitical environment are the key factors shaping up the global real estate market’s fate.

Let’s take a look at the industry’s three major themes:

The COVID-19 pandemic and market uncertainty: Post the financial crisis, the industry has been making a steady run, as commercial real estate markets witnessed elevated demand, rising absorptions, high occupancy and escalating rents. This came amid recovering economy, job-market gains, low-cost credit availability, as well as rising institutional capital inflows toward commercial real estate. However, the COVID-19 pandemic resulted in the recent macroeconomic uncertainty. There are certain areas which are likely to be affected though the ultimate outcome of this outbreak on this commercial real estate activity is not yet known. Capital markets and leasing activity are likely to bear the brunt in the near-term and investment volumes are expected to remain soft, given investors’ cautious stance.

Outsourcing of real estate needs: There is an increasing trend among occupiers of real estate, like corporations, public sector entities, health-care providers and others, toward the outsourcing of real estate needs. Companies are depending on the expertise of third-party real estate specialists for execution and efficiency improvement. This trend is likely to continue in the upcoming period, opening up scope for constituents of the real estate operations industry. Particularly, the large players are banking on this trend, with both existing as well as new client wins. Moreover, despite the present macroeconomic environment, this outsourcing opportunity will likely offer scope for growth.

Technology Investments: Investments in strategic acquisitions, human capital and technology will likely keep being the key focus for this industry’s constituent companies. These efforts offer significant competitive edge, help in market-share gains, and aid in differentiating from peers.

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 #160, which places it at the bottom 37% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 negative earnings per share outlook for the constituent companies in aggregate. Looking at the aggregate earnings per share estimate revisions, it appears that analysts are losing confidence in this group’s growth potential. Over the past year, the industry’s earnings per share estimate for 2021 moved down 14.8%.

However, before we present a few stocks that you may still want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags on Stock Market Performance

The Zacks Real Estate Operations industry has underperformed both the broader Zacks Finance sector, and the Zacks S&P 500 composite in a year’s time.

The industry has plunged 34.5% during this period compared with the S&P 500’s decline of 18.2%. During the same time frame, the broader Finance sector has depreciated 29.4%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the forward 12-month price-to-EPS ratio, which is a commonly-used multiple for valuing Real Estate Operations stocks, we see that the industry is currently trading at 8.79X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 13.41X.The industry is also trading below the Finance sector’s forward 12-month P/E of 9.28X. 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 22.36X, as low as 9.73X, with a median of 18.45X.

Bottom Line

In a nutshell, the recent macroeconomic uncertainty due to the coronavirus outbreak will likely keep growth of the constituent members of this industry challenging in the days to come. However, current valuations indicate that much of this weakness is already priced. Along with these, the rising trend of outsourcing of real estate needs by companies will provide ample scope for growth to the real estate operations industry. Moreover, volumes are likely to pick up once the uncertainty recedes.

Here we present two stocks from the industry with a Zacks Rank #1 (Strong Buy) and 2 (Buy) that investors may consider adding to their portfolios. Moreover, we handpick another stock from the industry with a Zacks Rank of 3 (Hold) to watch for.

eXp World Holdings Inc. (EXPI - Free Report) : It is the holding company for eXp Realty and VirBELA, based in Bellingham, WA. The company provides cloud-based real estate brokerage services primarily in the United States and Canada.The stock sports a Zacks Rank #1, currently. The Zacks Consensus Estimate for the current-year earnings per share has been revised upward over the last 30 days. Moreover, the estimate for current-year sales indicates a 46.2% jump year over year.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Colliers International Group Inc. (CIGI - Free Report) : Headquartered in Toronto, Canada, Colliers International Group provides commercial real estate services including outsourcing and advisory services, lease brokerage and sales brokerage. The company operates across the Americas, Europe, Middle East and Africa (EMEA) and the Asia Pacific. Currently, the stock carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2020 earnings per share of $5.28 indicates 13.1% year-over-year growth.

CBRE Group, Inc. (CBRE - Free Report) : Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm. It offers a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe. CBRE Group carries a Zacks Rank of 3, currently. The Zacks Consensus Estimate for the ongoing-year earnings per share of $3.95 indicates an increase of 6.5% year on year. Additionally, the company’s long-term growth of earnings is projected at 11%, higher than the industry average of 9.4%.


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