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3 Real Estate Operation Stocks Poised to Escape the Pandemic Blues

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Amid the prevailing health crisis and the macroeconomic turbulence, property leasing and sales businesses of the Zacks Real Estate Operations industry constituents are expected to be affected in the days to come.

Nevertheless, the vaccination drive and stimulus package raise hopes for this industry, and acceleration of certain trends by the pandemic and rising tendency of outsourcing of real estate needs by companies are opening up scopes, while technological investments are creating a competitive edge. As such, Brookfield Asset Management Inc. (BAM), CBRE Group, Inc. (CBRE) and Colliers International Group Inc. (CIGI) are likely to benefit.

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, government policies, as well as the global and regional real estate markets 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 geo-political environment are the key factors shaping up the global real estate market’s fate.

What’s Shaping the Real Estate - Operations Industry’s Future?

COVID-19 pandemic to affect property leasing and sales in near term: After witnessing solid property sales and leasing activity in the past decade on surging demand for space, falling vacancies, higher rents and strong capital flows, the commercial real estate markets faced a jolt last year with the outbreak of the coronavirus pandemic that triggered substantial contraction of economic activity across the globe, in turn affecting this industry. Particularly, the higher-margin property leasing and sales businesses continue being impacted with deals on hold and in flux as property owners and occupiers reel under uncertainty. There is likely to be no respite in the near term, with Covid-19 caseloads still remaining high across key markets around the world. Business travel and face-to-face business dealings remain restricted and as such real estate acquisition, disposition, financing, construction and leasing activities are likely to be subdued in the days to come term until the health crisis dissipates. Also, any decline in the value of commercial real estate and in rents due to the global crisis and economic weakness will dent the constituent company’s revenues from property commissions, while potential delays in payments from clients also remain key concerns.

COVID-19 pandemic accelerating trends and creating opportunities: Despite the adverse impact on the higher-margin property leasing and sales businesses, the pandemic is accelerating a number of trends that were present prior to the pandemic’s onset, as well as compelling businesses to transform. Specifically, global industrial leasing activity backed by e-retailing has been hogging the limelight, proving this asset type’s resiliency amid the pandemic. A number of workplace trends that were present before the pandemic, such as experiential workspaces, outsourced real estate functions, together with greater-than-before focus on employee well-being have also gained much prominence, thereby creating scopes for these industry participants to bank upon. As such, players with broad diversification across property types, geography, business lines and clients have opportunities to escape the heat.

Outsourcing of real estate needs to gather more steam: Occupiers of real estate, such as corporations, public sector entities, health-care providers and others, have been increasingly opting for the outsourcing of real estate needs, thereby 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 prospects for constituents of the real estate operations industry. In particular, the large players are capitalizing on this trend, with both existing as well as new client wins and expansions, which includes advising on re-entry strategies and code of behavior. Nonetheless, the economic uncertainty and cautious attitude of clients/corporate occupiers might cause delays on real estate decisions in the days to come.

Technology Investments Offer Competitive Edge: The pandemic has aggravated the technological disruption in the commercial real estate industry, and the big players in this industry are focusing on process improvements and leveraging their technology platform. These efforts offer significant scope for growth even amid the social-distancing measures, drive efficiency, deliver differentiated client services, help in market-share gains, and aid in differentiating from peers. As such, investments in technology will likely keep being the key focus for this industry’s constituent companies.

Vaccination Drive, Macroeconomic Gains to Drive Recovery: The rate of recovery is likely to gain pace with widespread vaccinations, realization of the full impact of the fiscal stimulus and faster economic recovery. Although the initial months of the current year have been challenging, the back half is anticipated to witness some improvement with vaccines becoming widely available, helping normal activities to resume and workers to return to offices. In fact, the restoration of business and consumer confidence, economic growth and job creation are likely to play a key role in the recovery of this industry. Furthermore, with substantial liquidity available, record low interest rates as well as government interventions continuing to support debt markets worldwide, commercial real estate capital markets are likely to rebound with the receding of the pandemic. The pace of recovery is, nonetheless, expected to be sluggish in a number of countries, with the unwinding of fiscal stimulus as well as cautious approach of households and businesses.

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 #157, 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 2021 and 2022 moved 13.4% and 18.4% south, respectively.

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 Leads on Stock Market Performance

The Zacks Real Estate Operations industry has outperformed the broader Zacks Finance sector as well as the S&P 500 composite over the past year.

The industry has appreciated 95.9%, during this period, as against the S&P 500’s rally of 53.8%. Meanwhile, the broader Finance sector has gained 52%.

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 26.92X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 22.66X. Also, the industry is trading above the Finance sector’s forward 12-month P/E of 17.15X. 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 34.16X, as low as 11.76X, with a median of 16.06X.

3 Real Estate – Operation Stocks to Survive the Industry Challenges

Brookfield Asset Management Inc.: This global alternative asset manager has $600 billion of assets under management across real estate, infrastructure, renewable power, private equity and credit. The company is co-listed on the New York and Toronto Stock Exchanges under the symbol BAM and BAM.A respectively. With access to large-scale capital and operational expertise, the company makes investments in significant, high-quality assets across geographies and asset classes.

Brookfield Asset Management presently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2021 earnings per share moved 6.8% upward to $2.04 over the past two months. The estimates also represent significant year-on-year increases. The stock has appreciated 10% year to date.

You can see the complete list of today’s Zacks #1 Rank stocks here.

CBRE Group, Inc.: Headquartered in Dallas, TX, CBRE Group is a commercial real estate services and investment firm. The company continues to benefit from the expansion of its resilient contractual businesses. Moreover, a strong balance sheet supports its acquisition moves aimed to enhance the company’s service offerings and geographic reach.

CBRE Group currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2021 earnings per share moved 13.5% upward over the past two months to $3.70. Additionally, the company’s long-term earnings growth rate is projected at 11%.The stock has also appreciated 29% so far in the year.

Colliers International Group Inc.: Headquartered in Toronto, Canada, Colliers International Group provides commercial real estate services including outsourcing and advisory services, lease brokerage and sales brokerage. The company operates across the Americas, Europe, 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 (Strong Buy). The Zacks Consensus Estimate for 2021 earnings per share moved 4.7% north over the past two months, reflecting positive sentiments. The consensus mark suggests an increase of 22.3% year on year. The company’s shares have rallied 15.7% so far in the year.

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