The Zacks Real Estate Operations industry constituents’ performances are likely to be affected by rising interest rates, inflationary pressure, macroeconomic challenges and geopolitical issues. There is an increase in underwriting requirements in the debt markets. The combination of less available and more expensive debt is affecting transaction activities. Higher interest rates are making clients adopt a cautious approach too. As a result, investors’ desire for a greater price discovery is causing a delay in the closing timeline for transactions.
Nevertheless, the rising tendency of outsourcing real estate needs by companies and the acceleration of certain trends amid the pandemic are creating scope for these industry participants to grow, while technological investments are creating a competitive edge. CBRE Group Inc. CBRE, FirstService Corporation FSV and Colliers International Group Inc. CIGI are likely to benefit from these favorable trends.
About the Industry
The Zacks Real Estate Operations industry comprises companies that provide leasing, property management, investment management, valuation, development services, facilities 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, both global and regional, which, in turn, determine this industry’s performance. Economic activity, employment growth, office-based employment, interest-rate levels, cost and availability of credit, tax and regulatory policies, as well as 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 business.
What's Shaping the Real Estate - Operations Industry's Future?
Interest Rates, Inflation and Geopolitical Issues Affecting Business: The industry’s performance is likely to continue to bear the brunt of rising interest rates, inflationary pressure, macroeconomic uncertainty and a choppy geopolitical environment. Russia’s invasion of Ukraine and the ongoing military conflict have escalated supply-chain disruptions and led to higher inflation and other macroeconomic challenges worldwide. With central banks around the world opting for interest rate hikes to tame inflation, there is a reduction in credit availability. This combination of less available and more expensive debt is affecting transaction activities. Debt markets are taking a cautious stance, but underwriting requirements have also increased. Higher interest rates are making clients adopt a cautious approach too. As a result, investors’ desire for greater price discovery is causing a delay in the closing timeline for transactions. These are leading to significant sales and leasing weakness and affecting this industry’s revenues in the near term.
Covid-19 Continues to Impact Operations: The pandemic has led to structural changes to the utilization of many types of commercial real estate. The return-to-office strategies of companies have been slow to gain momentum. Amid this, occupier confidence with respect to office leasing decisions for the long term is yet to return to the pre-pandemic levels. Also, business travel and face-to-face business dealings are yet to gain pace. The operating challenges are expected to continue in the upcoming period. Particularly, the cautious attitude of clients is likely to keep causing delays in real estate decisions in the days to come.
Outsourcing of real estate needs to gather more steam: Occupiers of real estate, such as corporations, public sector entities and healthcare providers, along with financial services, industrial, life sciences, and technology clients and others, have been increasingly opting for the outsourcing of real estate needs. They depend on the expertise of third-party real estate specialists for execution and efficiency improvements. The major real estate sectors, particularly healthcare and technology, are those in which a change in the use of real estate is leading to a surge in demand for outsourcing services. This is opening up prospects for the constituents of the real estate operations industry. The large players are capitalizing on this trend, with both existing as well as new client wins and expansions. Also, for this industry’s constituent companies, investments in technology will remain the major focus as it helps in driving efficiency, delivering differentiated client services and helping in market-share gains.
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 #203, which places it at the bottom 19% 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 the 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, of late, in this group’s growth potential. Over the past year, the industry’s earnings per share estimate for 2023 has moved 42.9% south.
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 Underperfoms Sector & S&P 500
The Zacks Real Estate Operations industry has underperformed the broader Zacks Finance sector as well as the S&P 500 composite over the past year.
The industry has declined 24.7% during this period compared with the S&P 500’s fall of 6.7% and the broader Finance sector’s decline of 5.6%.
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 19.95X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.96X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.77X. 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 33.66X, as low as 11.58X, with a median of 15.82X.
3 Real Estate - Operation Stocks Trying to Survive the Industry Challenges
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.
FirstService carries a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for the current-year earnings per share moved 1.9% north over the past month to $4.92. This suggests a 16.0% increase year over year. The company’s shares have rallied 9.6% over the past three months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
CBRE Group: Headquartered in Dallas, TX, CBRE Group is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial and other types of commercial real estates in all major metropolitan areas across the globe.
CBRE has been benefiting from diversification across asset types, business lines, client types and geographies as well as the expansion of its resilient contractual businesses in recent years. A strong balance sheet supports its acquisition moves .
CBRE Group currently has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2023 earnings per share has moved 1.6% upward over the past week to $5.14. The company’s shares have increased 6.6% over the past three months.
Colliers International Group: Headquartered in Toronto, Canada, Colliers International Group provides commercial real estate services, including outsourcing and advisory services, investment management, leasing and capital markets. The company operates across the Americas, Europe, the Middle East and Africa and the Asia Pacific.
CIGI is poised to ride the growth curve backed by its globally balanced and highly diversified business model. Its recurring revenues and efficiency in capitalizing on opportunities augur well.
Colliers International currently carries a Zacks Rank #3. The Zacks Consensus Estimate for 2023 earnings per share has moved 4.3% north over the past month, reflecting positive sentiments. The consensus mark suggests an increase of 10.3% year on year. The company’s shares have rallied 22.1% over the past three months.
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