The Zacks Real Estate – Development industry is likely to face challenges due to the current high interest rates and stringent credit conditions, with investors continuing to delay the timeline of their transactions in anticipation of better price discovery. Supply chain constraints, macroeconomic uncertainty and geopolitical tensions are projected to inflate material expenses, consequently impeding the speed of new project completions.

However, recovery in demand for certain real-estate property types and a slowdown in the pace of new deliveries are likely to provide the industry some support, placing players like Green Brick Partners, Inc. (GRBK Quick QuoteGRBK - Free Report) and Forestar Group Inc. (FOR Quick QuoteFOR - Free Report) and Landsea Homes Corporation (LSEA Quick QuoteLSEA - Free Report) well for growth.

About the Industry

The Zacks Real Estate – Development industry comprises companies that are mainly 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 holdings to eventually sell the properties to homebuilders, retaining the same for conducting operations is also a common practice. Some industry participants actively undertake strategic activities, such as infrastructure improvement, along with land planning and development to boost economic development, attract quality job creators and diversify the regions in which the firms operate. These firms provide real estate leasing, stewardship, underwriting, planning and entitlement services. Real estate development companies are chiefly classified as financial ones, not construction firms.

What's Shaping the Future of the Real Estate Development Industry?

Elevated Interest Rates Continue Impacting Business Sentiment: The buyer sentiment remains subdued due to the prevalent a high interest rate environment. Although some investors are endeavoring to capitalize on the existing market dynamics, many maintain a cautious stance, causing delays in transaction closures and reducing deal volumes. Tight credit conditions exacerbate the situation. With skepticism surrounding the timing of rate cuts, these market conditions are anticipated to persist. Consequently, the likelihood of a significant upturn in commercial real estate investment activity appears uncertain in the near term.

Supply-Chain Woes & High Material Costs Linger: Macroeconomic uncertainty and geopolitical unrest have consistently caused disruptions in the supply chain across multiple stages in recent years. This, coupled with high interest rates, pushed up the cost of raw materials. However, with high mortgage rates, not many buyers are being able to afford new homes at higher prices. Until and unless macroeconomic uncertainty improves, sales activity is likely to remain subdued in the forthcoming period.

Demand Revival for Certain Asset Classes and Constrained Supply Help Industry Fundamentals: Demand for certain real estate categories such as residential, industrial, logistics and retail are witnessing a rebound. Particularly, the residential market is experiencing renewed demand, with builders focusing on building more affordable homes equipped with additional upgrades. Meanwhile, the e-commerce surge and supply-chain strategy transformations are driving growth in industrial and logistics real estate. Further, the post-pandemic resurgence in consumers' preference for in-person shopping is propelling retail real estate demand in high-traffic corridors as retailers eye expansion to satisfy this demand. However, disruptions in the supply chain, coupled with high interest rates, have not only pushed up the cost of raw materials but also slowed down the pace of new construction deliveries. Particularly, the residential market is grappling with a substantial shortage of new homes, stemming from more than a decade of under-building compared with population growth. Additionally, the existing home supply is constrained as current homeowners are hesitant to sell and reluctant to give up their low-interest-rate mortgages. This supply shortage is likely to play a role in maintaining favorable industry fundamentals.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #221, which places it in the bottom 12% of around 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. For 2024, the industry’s earnings estimates have moved 33.6% south since the end of October 2023. Over the same time frame, the industry’s earnings estimates for 2025 have been lowered 43.1%.

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 Underperforms the Sector and the S&P 500

The Zacks Real Estate – Development industry has underperformed the S&P 500 composite and the broader Finance sector over the past year.

The industry has risen 8.2% during this period against the S&P 500 composite’s growth of 20.8%. The broader Finance sector has increased 17.6%.

One-Year Price Performance

 

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is a commonly used multiple for valuing real estate development companies, we see that the industry is currently trading at 5.85X compared with the S&P 500’s 20.15X. The industry is trading below the Finance sector’s forward 12-month P/E of 14.3X. This is shown in the chart below.

Forward 12-Month Price-to-Earnings (P/E) Ratio

 

Over the past five years, the industry has traded as high as 29.94X and as low as 3.43X, with a median of 8.35X.

3 Real Estate Development Stocks to Consider

Green Brick Partners, Inc.: This is a publicly traded, diversified homebuilding and land development company operating in Texas, Georgia and Florida. It is engaged in all aspects of the homebuilding process, including land acquisition and development, entitlements, design, construction, marketing and sales for its residential neighborhoods and master-planned communities.
 
GRBK enjoys several strategic advantages, including a substantial presence in markets experiencing considerable job growth and boasting favorable demographics in the United States. Its advantages extend to superior land and lot reserves and a diverse range of product offerings, positioning it favorably for expansion.

Particularly, with superior infill and infill-adjacent locations in high-growth markets, GRBK is likely to continue to benefit amid the persistent low supply of existing and new home inventory in its markets.

GRBK currently has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2024 EPS of $6.77 suggests a 10.3% increase year over year. Also, the Zacks Consensus Estimate for 2025 EPS of $7.39 indicates a 9.1% rise year over year. The stock has appreciated 34.7% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

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

Forestar Group is likely to benefit from the healthy demand for residential lots, particularly at affordable price points. However, the supply of vacant developed lots, mainly at affordable price points, continues to be limited across a major part of the country.

There is a decent demand for new construction, with demographics providing support, even amid high mortgage rates and inflationary pressures, while the supply of new and existing homes at affordable price points, as well as resale properties, remains limited. Also, with low net leverage and a strong liquidity position, FOR remains well-poised to navigate any challenges and bank on growth scopes.

Forestar Group currently has a Zacks Rank #3. The Zacks Consensus Estimate for its fiscal 2024 EPS has been revised 20.2% upward to $3.93 over the past three months. This also suggests an 18.02% increase year over year. Also, the Zacks Consensus Estimate for fiscal 2025 EPS has been raised 8.4% over the past three months. The company’s shares have rallied 35.1% in the past six months.

 

Landsea Homes Corporation: This Dallas, TX-based publicly traded residential homebuilder designs and builds best-in-class homes and sustainable master-planned communities in some of the United States' most desirable markets. The company has developed homes and communities in New York, Boston, New Jersey, Arizona, Colorado, Florida, Texas and throughout California in Silicon Valley, Los Angeles and Orange County.

Though high interest rates have exerted downward pressure on demand nationwide, primarily due to reduced affordability for numerous prospective homebuyers, Landsea Homes is expected to benefit from its efforts to enter new markets, focus on entry-level product offerings and strengthen its brand position through product differentiation.

LSEA currently has a Zacks Rank #3. The Zacks Consensus Estimate for its 2024 EPS of $1.48 suggests a 21.31% increase year over year. Moreover, the Zacks Consensus Estimate for 2025 EPS of $1.90 calls for a 28.38% rise year over year. The stock has appreciated 52.4% in the past six months.