The Zacks Real Estate – Development industry constituents are likely to face challenges due to geopolitical unrest and macroeconomic uncertainty. These factors are projected to increase material expenses and maintain high real estate prices. Until macroeconomic conditions improve, sales activity is likely to remain subdued in the near future.

However, healthy demand for a number of real estate property types and a slowdown in the pace of new deliveries are likely to provide the industry some support, placing players like Howard Hughes Holdings Inc. HHH and Green Brick Partners, Inc. GRBK 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?

Geopolitical Unrest to Affect the Industry: Geopolitical turmoil is likely to have a significant impact on the industry’s performance. The recent implementation of tariff on China, Canada, Mexico or other nations is expected to result in an inflationary environment. This has made investors skeptical about the economy’s outlook. Although the Federal Reserve has reduced interest rates in the second half of 2024, it is expected to make fewer cuts this year due to an anticipated high inflation. Amid such an environment, clients are likely to adopt a cautious approach. As a result, investors’ desire for greater price discovery will cause a delay in the closing timeline for transactions.

Macroeconomic Uncertainty Woes Linger: Conflicts that are happening in a number of countries have resulted in higher inflation rates and other macroeconomic concerns worldwide. Several capital sources are tightening their underwriting practices, reducing credit availability. In the upcoming period, sales activity is likely to stay subdued until macroeconomic conditions improve.

Demand Revival for Certain Asset Classes and Constrained Supply Helps Industry Fundamentals: 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 are driving growth in the industrial and logistics real estate space. Moreover, the office REITs companies are noticing an increase in the number of tenants returning to offices or announcing plans to do so. This is likely to support office real estate market fundamentals. However, in addition to raising the price of raw materials, an elevated interest rate environment has also slowed down the pace of new construction deliveries. Particularly, the residential market is experiencing a significant shortage of new homes as a result of more than a decade of under-building in comparison to population growth. The retail real estate market is also going through supply shortages, which is helping the industry fundamentals. Hence, the rebound in demand for certain real estate categories and supply shortage are 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 #198, which places it in the bottom 20% of 247 Zacks industries.

The group’s Zacks Industry Rank, which is 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 two to one.

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 2025, the industry’s earnings estimates have decreased by 16.7% since March 2024.

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 declined 7.8% during this period against the S&P 500 composite’s growth of 10.5%. The broader Finance sector has increased by 18.1%.

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 5.87X compared with the S&P 500’s 20.81X. The industry is also trading below the Finance sector’s forward 12-month P/E of 16.60X. This is shown in the chart below.

Over the past five years, the industry has traded as high as 29.99X and as low as 3.77X, with a median of 6.94X.

2 Real Estate Development Stocks to Consider

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 demographics. Particularly, with superior infill and infill-adjacent locations in high-growth markets, GRBK is likely to gain amid the strong demand for new homes in its markets.

GRBK currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its 2025 EPS of $8.61 suggests a 1.9% increase year over year. The stock has gained 0.6% in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Howard Hughes Holdings, Inc.: This 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 three business segments, namely Operating Assets, Master Planned Communities and Strategic Developments.

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 has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2025 EPS has raised significantly over the past two months to 92 cents. The company’s shares have gained 0.7% in the past month.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Green Brick Partners, Inc. (GRBK) : Free Stock Analysis Report

Howard Hughes Holdings Inc. (HHH) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research