Near-Term Outlook Bleak for Real Estate Operation Stocks
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, government policies, as well as the global and regional real estate markets determine the performance of this industry. Economic activity, employment growth, interest-rate levels, 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 coronavirus pandemic and market uncertainty: The coronavirus pandemic has brought in massive uncertainty, interruption of business activity, as well as adverse impact on global markets and on consumer and business sentiments. Amid this, there has been a decline in real estate acquisition, disposition, financing, construction and leasing activity, a trend that is expected to prevail in the near term. Investment in global commercial real estate as well as leasing volumes suffered with deals on hold and in flux, and depending on recovery, volumes will likely be affected for the rest of the year. Moreover, any decline in the value of commercial real estate and in rents due to the coronavirus crisis and economic weakness would affect the constituent company’s revenues from property commissions. Also, potential delays in payments from clients are key concerns.
Outsourcing of real estate needs: Occupiers of real estate, such as corporations, public sector entities, health-care providers and others, have been increasingly opting for 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. Also, there is a healthy demand from the media and technology and transportation/logistics and life sciences industries amid the pandemic. However, any robust growth is expected to be restrained given the economic uncertainty and operational challenges on boarding clients under the shelter-in-place orders, as the number of cases surge and prospects of reopening of the economy in several regions remain bleak.
Technology Investments and Capital: 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. Furthermore, with substantial liquidity available, commercial real estate capital markets are likely to recover sooner than the overall economy.
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 #146, which places it at the bottom 42% 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 in this group’s growth potential. Over the past year, the industry’s earnings per share estimate for 2020 moved 58.8% south.
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 Mixed on Stock Market Performance
The Zacks Real Estate Operations industry has outperformed the broader Zacks Finance sector but lagged the S&P 500 composite in a year’s time.
The industry has depreciated 12.8%, during this period, as against the S&P 500’s rally of 7.2%. Meanwhile, the broader Finance sector has lost 15.1%.
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 20.55X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 22.72X. However, the industry is trading above the Finance sector’s forward 12-month P/E of 16.21X. 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 20.55X, as low as 11.80X, with a median of 16.42X.
In a nutshell, growth of the constituent members of this industry will likely remain challenging in the days to come amid the macroeconomic uncertainty due to the coronavirus mayhem. Nevertheless, the rising trend of outsourcing of real estate needs by companies will provide scope for growth to the real estate operations industry. Additionally, volumes are likely to pick up once the uncertainty recedes.
Here we present three stocks from the industry with a Zacks Rank # 2 (Buy) that investors may consider adding to their portfolios.
CBRE Group, Inc. (CBRE): 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.
The Zacks Consensus Estimate of $2.54 for the ongoing-year earnings per share remained unchanged over the past month, while the same for 2021 moved marginally north to $3.35 in the past week. Additionally, the company’s long-term earnings growth rate is projected at 11%, higher than the industry average of 8.5%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Jones Lang LaSalle Incorporated (JLL): Headquartered in Chicago, IL, Jones Lang LaSalle offers commercial real estate and investment management services. The company provides a full range of leasing, capital markets, integrated property and facility management, project management, advisory, consulting, valuations and digital solutions services locally, regionally and globally.
The Zacks Consensus Estimate of $6.97 for current-year earnings per share has been unrevised over the past month, while the same for 2021 has moved marginally north to $10.51 in the last week. Additionally, the company’s long-term earnings growth rate is estimated at 9%, higher than the industry average of 8.5%.
FirstService Corporation (FSV): Headquartered in Toronto, Canada, FirstService Corporation offers property services to commercial, institutional and residential customers, primarily in North America and internationally.
The Zacks Consensus Estimate for 2020 earnings per share moved up 1.8% to $2.24, over the last 30 days. Moreover, the estimate for current-year sales indicates a 7.1% increase year over year.
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