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Is This the Market’s Next Victim?

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Everyone and their dog has been calling for a commercial real estate crash.

Morgan Stanley even issued a warning recently that we could see commercial real estate prices plunge by as much as 40%.

The supposed trigger for the crash is the $1.5 trillion-plus in commercial real estate debt that is due before the end of 2025.

With vacancy rates up and interest rates at their highest levels in over 15 years, some commercial real estate owners won’t be able to get their debt refinanced.

Perhaps a lot of them!

When debt can’t be refinanced, the underlying property is usually sold – either by the owner or by the lender after it repossesses the property.

And if a large number of refinancings fail in a short period of time, it could put huge pressure on commercial real estate prices.

Due to all the speculation about a potential commercial real estate crash, stocks in the sector have already been hit pretty hard.

One of the stocks that have sold off is Newmark Group (Nasdaq: NMRK).

Newmark’s share price has dropped by more than 60% since the beginning of 2022.

That sell-off has created an interesting entry point, and I think Newmark is positioned to be a beneficiary – not a victim – of a potential commercial real estate crash.

The key point to know here is that Newmark provides commercial real estate services – including brokerage, leasing, capital markets, valuation, property management and many others – but it is not a commercial real estate owner itself.

This is an asset-light, low-debt, fee-generating and cash-flowing business.

Another thing to keep in mind is that the price of commercial real estate is not as important to Newmark’s profits as the number of transactions occurring.

If the commercial real estate market crashes, we will see prices drop… but we won’t see transaction volumes follow suit.

That’s because landlords will be forced to rapidly sell properties to pay off debt… and Newmark will benefit from the increase in transaction volume.

For the full year 2023, the consensus analyst earnings estimate for Newmark is $0.92 per share. With the stock trading at just under $7 as I write, it has a price-to-earnings ratio of only 7.43.

Even more interesting, though, is the fact that Newmark’s business generates enough cash to repurchase $300 million worth of its common shares annually.

The company’s current market capitalization is $1.6 billion, which means it could repurchase almost 20% of its outstanding stock in just the next 12 months.

And its cash flow could increase in the coming years.

Considering the company’s rock-solid balance sheet and excessively beaten-down share price (not to mention its strong insider ownership), The Value Meter rates Newmark Group as “Slightly Undervalued.”

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