3 Real Estate Development Actions to Consider Despite the Sector’s Difficulties

Zacks Real Estate and Property Development players are likely to face challenges from the high interest rate environment as investors continue to delay the timing of their transactions in anticipation of better price discovery. Supply chain constraints, macroeconomic uncertainty and geopolitical tensions are expected to boost physical spending, keeping home prices elevated. Until macroeconomic conditions improve, sales activity will likely remain subdued for the foreseeable future.

However, a slowdown in the pace of new deliveries and a recovery in demand for certain categories of real estate should provide some support to the sector, placing players such as Howard Hughes Holdings Inc. HHH, Green Brick Partners, Inc. GRBK and Forestar Group Inc. FOR good for growth.

About the industry

The Zacks Real Estate – Development industry includes companies that are primarily 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 and eventually sell it to homebuilders, it is also common to hold the land to conduct operations. Some players in the industry actively undertake strategic activities, such as infrastructure improvements, land development and planning to stimulate economic development, attract quality job creators and diversify the regions in which the companies operate. These companies provide leasing, stewardship, underwriting, planning and real estate entitlement services. Real estate development companies are primarily classified as financial companies and not construction companies.

What is shaping the future of the real estate development industry?

High interest rates continue to affect sentiment: Buyer sentiment is currently low due to high interest rates. While some investors are trying to take advantage of the current market momentum, many are exercising caution, leading to transaction delays and lower deal volumes. While some easing from the Federal Reserve may be on the horizon, the timing and magnitude of such measures remain uncertain. Therefore, given the skepticism surrounding the timing of rate cuts, these market conditions are likely to persist. As a result, a significant increase in commercial real estate investment activity appears unlikely in the near future.

Supply chain issues and high material costs persist: Macroeconomic uncertainty and geopolitical unrest have repeatedly disrupted the supply chain at various stages in recent years. Combined with high interest rates, these factors have driven up the cost of raw materials. In addition, high mortgage rates have made it difficult for many buyers to purchase new homes at high prices. Until macroeconomic conditions improve, sales activity is likely to remain subdued in the near future.

Restricted Supply Assistance Industry Fundamentals: Supply chain disruptions, coupled with high interest rates, have not only driven up the cost of raw materials, but have also slowed the pace of new home deliveries. In particular, the residential market is facing a significant shortage of new homes, resulting from more than a decade of underbuilding relative to population growth. In addition, the supply of existing homes is limited as current homeowners are reluctant to sell and are reluctant to walk away from their low-interest mortgages. This shortage of supply should play a role in maintaining favorable sector fundamentals. In addition, the desire for homeownership has driven demand for housing in the United States. In addition, demand for certain categories of commercial real estate remains healthy, providing hope and prospects for investors.

Zacks Sector Rank Indicates Gloomy Outlook

The Zacks Real Estate Development industry is part of the Zacks Financials sector. It carries a Zacks Sector Rank of #162, which puts it in the bottom 35% of approximately 250 Zacks sectors.

The group’s Zacks Sector Rank, which is effectively the average of the Zacks Rank of all member stocks, indicates a weak outlook for the near term. Our research shows that the top 50% of the Zacks-ranked sectors outperform the bottom 50% by a factor of more than 2 to 1.

The sector’s positioning in the bottom 50% of Zacks-ranked industries is a result of the negative earnings outlook for the companies within it as a whole. Looking at aggregate earnings estimate revisions, it appears that analysts are losing confidence in the earnings growth potential of this group. For 2024 and 2025, the sector’s earnings estimates have declined by 6.8% and 28.5%, respectively, since January 2024.

However, before we present some stocks that you might consider adding to your portfolio, let’s take a look at the sector’s recent stock performance and valuation.

Industry underperforms sector and S&P 500

The Zacks Real Estate Development sector has underperformed the S&P 500 Composite Index and the broader Financial sector over the past year.

The sector declined 13.3% during that period, while the S&P 500 composite index grew 27.4%. The broader financial sector rose 20.5%.

Price performance over one year

Current Industry Assessment

Based on the 12-month forward price-to-earnings (PE) ratio, which is a commonly used multiple to value real estate development companies, we see that the sector is currently trading at 5.6X, compared to 22.14X for the S&P 500. The sector is trading below the financial sector’s forward 12-month PE of 14.59X. This is illustrated in the chart below.

12-month price-to-earnings ratio (PE)

Over the past five years, the sector has seen gains of up to 29.94X and declines of up to 3.73X, with a median of 8.51X.

3 Real Estate Development Actions to Consider

Howard Hughes’s contributions: The Woodlands, Texas-based company is engaged in the ownership, management and development of commercial, residential and mixed-use real estate throughout the United States.

Its assets include a portfolio of master-planned communities, other operating properties and development opportunities.

With its expertise in the real estate sector, the company is well positioned to take advantage of favorable demand in both the residential and commercial real estate markets. The company’s revenue is expected to increase by 62.2% in 2024.

Analysts appear bullish on this Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. The Zacks Consensus Estimate for 2024 EPS has been revised upward by 10.1% over the past week. The stock has gained 13.3% over the past three months.

Green Brick, Inc. Partners: It is a publicly traded, diversified homebuilding and land development company operating in Texas, Georgia and Florida.

It is involved in all aspects of the home building process, including land acquisition and development, entitlements, design, construction, marketing and sales of its residential neighborhoods and master-planned communities.

GRBK benefits from several strategic advantages, such as a significant presence in US markets with considerable employment growth and favorable demographics.

Its strengths extend to high-quality land and lot reserves and a diversified product offering, which positions it favorably for expansion. Specifically, GRBK’s infill and adjacent infill locations in high-growth markets are expected to continue to generate upside amid strong demand in its markets.

GRBK currently has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2024 EPS of $7.46 suggests a year-over-year increase of 21.5%. Furthermore, the Zacks Consensus Estimate for 2025 EPS of $8.27 indicates a year-over-year increase of 10.9%. The stock has gained 13.3% in the past three months.

Forestar Group Inc.: It is a majority-owned subsidiary of DR Horton, which focuses primarily on investing in land acquisition and development to sell finished single-family residential lots to local, regional and national homebuilders.

Forestar Group is expected to benefit from strong demand for residential land, particularly at affordable prices. However, the supply of developed vacant land, particularly in the affordable segment, remains limited in much of the country.

Despite high mortgage rates and inflationary pressures, demand for new construction is strong, supported by favorable demographics. The availability of affordable new and existing homes, as well as resale properties, remains limited.

Forestar Group currently sits at #3 in the Zacks Rank. The Zacks Consensus Estimate for its fiscal 2024 EPS of $3.87 suggests a year-over-year increase of 16.2%. Moreover, the Zacks Consensus Estimate for fiscal 2025 EPS of $4.19 is projecting a year-over-year increase of 8.3%. Shares of the company have gained 3.4% in the past month.

Want to know the latest recommendations from Zacks Investment Research? You can download the top 7 stocks for the next 30 days today. Click to get this free report