The Zacks Real Estate Operations industry constituents’ performances are likely to be affected by rising interest rates, inflationary pressure and a choppy geopolitical environment. Investors have become more cautious, which has been affecting transaction closing time and pricing. In the debt markets, there is an increase in underwriting requirements. Also, limited business travel and face-to-face business dealings, and a large chunk of workers remaining out of their offices will likely affect real estate decisions in the near term.
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 bank on, 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. Nonetheless, 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. Pandemic-induced public health challenges and mayhem too have impacted property sales and leasing lines of businesses.
What’s Shaping the Real Estate – Operations Industry’s Future?
Geopolitical Environment, Interest Rates and Inflation Affecting Business: Russia’s invasion of Ukraine and the ongoing military conflict pose concerns for Europe’s real estate industry. Moreover, the conflict has escalated supply-chain disruptions and led to higher inflation and other macroeconomic challenges worldwide. Therefore, despite the presence of liquidity in the market, the industry’s performance is likely to be affected by rising interest rates, inflationary pressure and a choppy geopolitical environment. Particularly, investors have become more cautious, which has been affecting transaction closing time and pricing. Debt markets are not only adhering to a cautious stance but there is also an increase in underwriting requirements, affecting transaction activities. Also, the cautious attitude of clients/corporate occupiers are causing delays in real-estate decisions, thereby affecting this industry’s revenues.
Covid-19 continues to impact operations: With improvements in the global economic conditions, the effects of COVID-19 eased significantly in 2021 and early this year. However, the health crisis continues to impact this industry’s operations. This is because a large chunk of workers remains out of their offices. Amid this, occupier confidence with respect to office leasing decisions for the long term is yet to return to pre-pandemic levels. Also, business travel and face-to-face business dealings are still limited. The operating challenges are expected to continue in the upcoming period. Particularly, the cautious attitude of clients/corporate occupiers is likely to keep causing delays in real estate decisions in the days to come.
Ample Liquidity, Resilient Sectors, Pandemic Accelerating Trends to Drive Growth: With increased competition and ample capital being directed toward commercial real estate, pricing is getting a boost. While a number of commercial real estate segments showing operational resilience have already attracted capital flows, the asset categories that were considered not favorable during the earlier months of the pandemic are now experiencing an increase in capital flow, which is encouraging. Moreover, the pandemic accelerated a number of trends that were present prior to its onset, as well as compelled businesses to transform. Specifically, the global industrial leasing activity, backed by e-retailing, has been robust, proving this asset type’s resiliency amid challenging times. Also, a number of workplace trends that were present before the pandemic, such as experiential workspaces, outsourced real estate functions, together with a greater-than-before focus on employee well-being, have gained prominence. These are creating scope for the industry participants to bank on and opportunities for players with broad diversifications across property types, geography, business lines and clients to excel.
Technology Investments Offer Competitive Edge: The pandemic has intensified technological disruptions in the commercial real estate industry. Amid this, big players in this industry are aiming for process improvements and leveraging their technology platforms. These moves drive efficiency, deliver differentiated client services, 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 #155, which places it at the bottom 38% 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 2022 has moved 2.5% 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 31.5% during this period compared with the S&P 500’s fall of 13.2% and the broader Finance sector’s decline of 11.8%.
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 14.07X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.2X. However, the industry is trading above the Finance sector’s forward 12-month P/E of 13.67X. This is shown in the chart below.
Over the last five years, the industry has traded as high as 33.77X, as low as 11.61X, with a median of 15.95X.
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 the United States and Canada, is poised to benefit from the strong demand for the company’s services and increased activity levels.
FirstService carries a Zacks Rank #1 (Strong Buy) at present. The Zacks Consensus Estimate for ongoing-year earnings per share of $4.28 is backed by a 12.2% projected increase in full-year revenues. The company’s shares have rallied 3.2% quarter to date.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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.
The company is poised to ride on the growth curve backed by strategic acquisitions that increase market share, expansion of service offerings and geographic reach.
Colliers International currently sports a Zacks Rank #1. The Zacks Consensus Estimate for 2022 earnings per share has moved 4% north over the past month, reflecting positive sentiments. The consensus mark suggests an increase of 21.4% year on year. The company’s shares have rallied 6.5% so far in the quarter.
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, multi-family and other types of commercial real estates in all major metropolitan areas across the globe.
CBRE Group continues to benefit from the expansion of its resilient contractual businesses. Furthermore, a strong balance sheet supports its acquisition moves aimed at enhancing the company’s service offerings and geographic reach.
CBRE Group currently has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2022 earnings per share has moved 1.3% upward over the past month to $6.13. This also calls for 5.7% increase year over year. The stock has appreciated 7.3% so far in the quarter.
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CBRE Group, FirstService and Colliers International Group are part of Zacks Industry Outlook article.
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