The Zacks Real Estate – Development industry constituents are poised to benefit from the recent interest rate cut, healthy demand for a number of real estate property types and a slowdown in the pace of new deliveries, placing players like Howard Hughes Holdings Inc. (HHH Quick QuoteHHH - Free Report) , Green Brick Partners, Inc. (GRBK Quick QuoteGRBK - Free Report) and Forestar Group Inc. (FOR Quick QuoteFOR - Free Report) well for growth.

However, macroeconomic uncertainty and geopolitical tensions are concerns, resulting in supply-chain constraints and are projected to inflate material expenses, keeping prices of real estate high. Until macroeconomic conditions improve, sales activity is likely to remain subdued in the near future.

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?

Interest Rate Cut Makes Buyers’ Sentiment Optimistic: Last month, the Federal Reserve provided some relief to potential buyers after the announcement of a reduction in interest rates. This decision has boosted buyer sentiment for the remainder of 2024 and 2025. Lower interest rates are likely to encourage the development of real estate as the companies can now borrow at lower costs.

Constrained Supply Helps Industry Fundamentals: A single rate cut alone is not expected to immediately alleviate lingering concerns around. However, the elevated interest rate environment in the past quarters has 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. The retail real estate market is also going through supply shortages, which is helping the industry fundamentals. This supply shortage is likely to play a role in maintaining favorable industry fundamentals.

Demand Revival for Certain Asset Classes Gives Scope for Growth: Demand for certain real estate categories such as retail, industrial and logistics, and office are witnessing healthy growth. 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. Meanwhile, the e-commerce boom and supply-chain strategy transformations provided an impetus to the industrial and logistics real estate space. Moreover, the office REITs companies are seeing an increasing number of tenants returning to offices or announcing plans to come back. The demand for premier office portfolio in the key markets continues to outperform. This is likely to support office real estate market fundamentals. This upbeat trend is expected to persist in the upcoming period, poising real estate development players well for growth. Therefore, these categories are raising hopes and prospects for investors.

Macroeconomic Uncertainty & Supply-Chain Woes Linger: Although investor sentiment has improved to a certain extent, as they try to make the best out of the present market conditions, a cautious stance among many continues. Several capital sources are tightening their underwriting practices, reducing credit availability. As a result, the volume of commercial real estate transactions remains on the lower side. Per the CBRE report, U.S. commercial real estate investment volume decreased 3% year over year in the second quarter of 2024 to $86 billion. Moreover, macroeconomic uncertainty and geopolitical unrest have repeatedly disrupted the supply chain at various stages in recent years. Until macroeconomic conditions improve, sales activity is likely to remain subdued in the near future.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #87, which places it in the top 35% of 252 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright 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 two to one.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the upward earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. For 2024 and 2025, the industry’s earnings estimates have increased by 10.6% and 7.8%, respectively, since April 2024.

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 gained 28% during this period compared to the S&P 500 composite’s growth of 33.7%. The broader Finance sector has increased 31.9%.

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 6.73X compared with the S&P 500’s 21.57X. The industry is also trading below the Finance sector’s forward 12-month P/E of 16.2X. 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 3.73X, with a median of 7.60X.

3 Real Estate Development Stocks to Consider

Howard Hughes Holdings: The Woodlands, TX-based company is engaged in the ownership, management and development of commercial, residential and mixed-use real estate throughout the United States. The company operates through four business segments, namely Operating Assets, Master Planned Communities, Strategic Developments and Seaport.

Its assets include a portfolio of master-planned community assets, buildings and equipment, land and developments. With its expertise in the real estate sector, the company is well-poised to bank on the favorable demand in the residential and commercial real estate markets.

HHH currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its 2024 EPS of $3.28 suggests a significant increase year over year. The stock has gained 14.3% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Green Brick Partners, Inc.: This is a 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, such as a significant footprint in the U.S. markets with considerable job growth and the best demographics. 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 yield continued benefits amid the strong demand for new homes in its markets.

GRBK currently has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2024 EPS of $8.35 suggests a 36% increase year over year. The stock has increased 47.8% in the past three months.

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 strong demand for residential lots, particularly at affordable price points. However, the supply of new and existing homes, particularly in the affordable segment, 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 of $3.72 suggests an 11.7% increase year over year. The company’s shares have risen 6.6% in the past month.