Development Dollars Help Skanska Soar

Development Dollars Help Skanska Soar

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By Bruce Buckley

Skanska USA is firing on all cylinders in the mid-Atlantic region. Prior to the recession, Skanska had already established itself as a formidable contractor in both the building and civil sectors. As the economic downturn began to take its toll on construction firms, the company made a strategic decision to invest in project development in the region, putting its financial resources to work while leveraging its construction knowledge. Today, Skanska's mid-Atlantic operations are stronger than ever, resulting in record regional revenue for the company. In light of the success of these strategies, ENR Mid-Atlantic named Skanska its Contractor of the Year.

Sweden-based Skanska has a well-established track record in commercial and infrastructure development in such global markets as Europe and South America. In 2008, the company made a concerted effort to expand those capabilities into the U.S., targeting the mid-Atlantic region as an area of focus. In 2009, it landed its first commercial development deal by buying the stalled 733 10th Street, NW, project in Washington, D.C., in an all-cash deal. When completed by Skanska USA Building in September 2011, most of the 171,000-sq-ft office building had been preleased. In May 2012, Skanska sold it to Jamestown Properties for $141 million, at a reportedly significant profit.

In 2012, Skanska closed its first public-private partnership deal in the U.S.—the $2.2-billion Midtown Tunnel in Norfolk, Va. In addition to public funds, a partnership of Skanska Infrastructure Development and Macquarie Financial Holding Ltd. secured private investment. Skanska USA Civil Southeast, Kiewit Construction Co. and Weeks Marine joint-ventured to construct the two-lane immersed tube tunnel under the Elizabeth River, which is scheduled for a 2017 completion.

Through those projects, the mid-Atlantic became the only region in the U.S. where Skanska has leveraged all of its resources: building, civil, commercial development and infrastructure development. "The strength of Skanska in the mid-Atlantic is those four U.S. business units," says Karl Reichelt, executive vice president of Skanska Infrastructure Development North America. "We're making a powerful statement in this market. This is truly a home market for us."

Reichelt says that, rather than hunker down and try to weather the turbulence of the recession, the company decided to use the downturn to its advantage and gain a foothold when other owners couldn't—or wouldn't—invest in projects. As a result, Skanska positioned itself to reap the rewards of its investments while keeping its construction staff engaged during an otherwise slow market. "We didn't want to wait around for the recession to clear and wait for contracts to be offered by both public and private clients," he says. "We struck at the right time, which resulted in great projects for our company and good profit."

Already, the company is realizing results. Prior to the recession, Skanska typically tallied annual regional revenue between $300 million and $400 million, peaking at $535 million in 2006. In 2013, it hit new heights in the region with $636.9 million in revenue, making it one of the few large contractors to see higher revenue in recent years compared with prerecession levels.

Skanska executives credit much of the success of Skanska's commercial and infrastructure developments to its in-house construction units. Sal Taddeo, executive vice president of Skanska USA Civil Southeast, says Skanska's various business units collaborate often on projects to help make informed business decisions. Taddeo says that on the Midtown Tunnel project, his group worked in tandem with infrastructure development to create estimates, address construction-related complexities and consider future operations and maintenance challenges.

"Our infrastructure development (ID) unit can't take credit alone for a project like Midtown Tunnel," he says. "They wouldn't have won without civil, and civil couldn't have won without ID. Together, we were able to leverage our equity as well as our global construction knowledge to win that project."

Taddeo says he sees those synergies with the building unit as well. "If a project has some complex civil matters, they will engage with us and, likewise, we will go to them for their expertise."

On the $64-million 11th Street Bridge Project in Washington, which broke ground last year and is scheduled to be completed in 2015, Taddeo says Skanska USA Civil brought in Skanska's building division to reconstruct a boathouse on the site.

Skanska Civil has made big strides on its own in recent years. Taddeo says that between 2005 and 2010, the Southeast division averaged about $250 million in annual revenue. This year it is expected to more than double that tally. To aid in the effort, staff has grown by roughly 35%, he says.

Tunnel projects have become a prominent part of its business. In addition to the Midtown Tunnel, Skanska Civil is also building two tunnels for DC Water. A $330-million, 26-ft-dia, 4-mile-long tunnel is being built at Blue Plains Advanced Wastewater Treatment Plant by a joint venture of Skanska, Traylor Bros. and Jay Dee using a giant tunnel boring machine. Skanska also broke ground on the $151-million First Street Tunnel project for DC Water last year.

On the building side, Skanska has seen expanded opportunities as well. Rob Ward, executive vice president and regional manager for Skanska USA Commercial Development, says that knowing how to read the market and being opportunistic have paid off. Skanska's commercial development unit was announced in fall 2008, right when the recession was taking hold.

"The timing seemed questionable to some," he says. "It was an awful time for most developers, but it was a good time for us. D.C. has very high barriers to entry in the real estate market. To come in at the bottom of the cycle was good for us. That gave us a foothold here."

Skanska expects to break ground on its 240,000-sq-ft 99 M Street, SE, office building in Washington by the end of the year. Ward says the company also hopes to start work on another 250,000-sq-ft office building at 2100 W. Pennsylvania Avenue, NW, in Washington next year. It also owns three large properties in Washington's NoMa district, which it plans to develop as office and residential properties.

Ward says its internal relationship with Skanska USA Building is the key component to its success. The teams engage very early to determine the viability of a project, running estimates and working with architects in design development. "Sometimes that relationship with external contractors can be adversarial," he says. "That's never the case on our projects. Everyone understands that we're on the same team. We eliminate the things that might slow down a project in a third-party relationship."

The company also offers turnkey options for prospective tenants through its interiors group.

Jeff Barber, principal and managing director of Gensler's D.C. office, says Skanska's model brings benefits to the design process. Gensler is the architect on Skanska's 99 M Street project. "It's special for us to work with Skanska because the development and construction are aligned," he says. "We see the benefits of being on board with them early, as well as them having a kinship and an alignment in goals."

Outside of its development work, Skanska Building faces the same challenges as most mid-Atlantic contractors, says Edward Szwarc, executive vice president and general manager in Skanska USA Building's Philadelphia office. His office once banked primarily on health care and pharmaceutical sector work. While health care opportunities remain, he says pharmaceutical work in the region has largely dried up.

"In 2010, we did a strategic plan," he says. "We looked at what was coming up and we knew that, to survive in the region, we had to adapt."

In response, the company has diversified into other sectors. In July, Skanksa broke ground on a $164-million expansion of the SugarHouse Casino in Philadelphia. In June, the company completed a $37.4-million addition to The Franklin Institute in Philadelphia. The company is working on its second student housing project for University of Delaware—a $25-million renovation of Harrington Residence Hall. Szwarc says the company is also building data centers for existing clients.

Health care remains a strong sector for Skanska, especially in Delaware, where it is ranked as the largest contractor by revenue. In late 2013, it completed a $210-million expansion of the Wilmington Hospital and it is on schedule for the fall completion of a $257-million, 450,000-sq-ft expansion of the Nemours/Alfred I. duPont Hospital for Children in Wilmington.

Szwarc says that although the market in Philadelphia and the surrounding area has been challenging, he sees signs of hope. "There is a lot in planning and it looks like we could see a lot of new work in the next five years," he says. "By next year, we should see a substantial uptick."