The Zacks Real Estate Operations industry constituents’ performances are likely to be affected by rising interest rates, inflationary pressure and a choppy geopolitical environment. In the debt markets, there is an increase in underwriting requirements. 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. Further, adverse foreign currency movements are limiting cross-border capital flows.
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. Kennedy-Wilson Holdings, Inc. (KW – Free Report) , FirstService Corporation (FSV – Free Report) and The RMR Group Inc. (RMR – Free Report) 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?
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, the industry’s performance is likely to continue to bear the brunt of rising interest rates, inflationary pressure and a choppy geopolitical environment. With central banks around the world opting for interest rates 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 a greater price discovery is causing a delay in the closing timeline for transactions. These are affecting this industry’s revenues and any significant turnaround is likely to remain elusive in the near term. Further, adverse foreign currency movements are limiting cross-border capital flows.
Covid-19 Continues to Impact Operations: The health crisis continues to impact this industry’s operations. 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/corporate occupiers is likely to keep causing delays in real estate decisions in the days to come.
Pandemic Accelerating Trends to Drive Growth: 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 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, 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. Hence, for this industry’s constituent companies, investments in technology will remain the major focus.
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 #204, which places it at the bottom 18% 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 13.1% south. Moreover, from February, the same for 2023 has declined 17.2%.
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 35.9% during this period compared with the S&P 500’s fall of 15.1% and the broader Finance sector’s decline of 9.5%.
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 13.97X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 17.58X. However, the industry is trading above the Finance sector’s forward 12-month P/E of 13.74X. 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 15.83X.
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, serving its customers through two service platforms — FirstService Residential and FirstService Brands — is poised to benefit from the strong demand for its services.
FirstService carries a Zacks Rank #3 (Hold) at present. The Zacks Consensus Estimate for the current-year earnings per share of $4.23 is backed by a 13.9% projected increase in full-year revenues. The company’s shares have rallied 8.7% quarter to date.
Kennedy Wilson: Headquartered in Beverly Hills, CA, Kennedy Wilson is a global real estate investment company. KW is engaged in the ownership, operation, and investment in real estate both on its own and through its investment management platform. Kennedy Wilson focuses on multifamily and office properties located in West United States, UK, and Ireland.
The company is expected to benefit from the continued expansion of its investment management business and healthy demand for its high-quality multifamily portfolio.
Kennedy Wilson currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2022 earnings per share has moved 4% upward over the past month to $1.82. Moreover, the same for 2023 has climbed 1.6% north over the past month to $1.91. The stock has appreciated 10.1% so far in the quarter.
The RMR Group Inc.: This company, headquartered in Newton, MA, is an U.S. alternative asset management company. It primarily provides management services to publicly owned real estate investment trusts and real estate operating companies.
Amid the macroeconomic headwinds and market volatility, the company continues to benefit from its substantial fee stability. RMR has no debt and is well-poised to capitalize on opportunities stemming from market dislocation and boosts long-term growth.
RMR currently has a Zacks Rank #3. The Zacks Consensus Estimate for fiscal 2023 earnings per share of $2.18, calls for a projected increase of 2.8% year over year. The company’s shares have rallied 22.0% so far in the quarter.
