Skanska may expand US office property business

Stockholm

SWEDISH construction company Skanska AB is considering expanding its US property development business to cities such as San Francisco and Los Angeles where a technology boom is fuelling demand for office space.

"We have the opportunity to do more now," Mats Johansson, head of Skanska's US commercial development unit, said in an interview in Stockholm. Skanska already operates in Washington, Seattle and Boston, where competition for prime land has made new projects harder to come by.

As US unemployment has fallen to its lowest level since April 2008, demand for office space is at its highest levels since the recession, with leased space expected to rise by about 47 million square feet this year, 48 per cent more than in 2014, according to real-estate data provider Reis. Skanska entered the market in 2009 and expects to start one new project in Washington and another in Boston before the end of the year.

In addition to the two California cities, Skanska is also considering new developments in Miami, Denver and Dallas as part of its US expansion plan, Mr Johansson said in the interview. "Those are examples of cities we know well, where we have construction operations, and which have the right fundamental growth drivers and demographic properties," he said. "They are successful cities with strong growth and quality of life."

Within the next couple of years, Skanska expects to make a decision on entering one or two new US markets. "The next step is to narrow down the list, and then you need to have people on the ground to understand the local market," Mr Johansson said. Skanska develops office property in central Europe and the Nordic countries. It started its first US office projects in the wake of the financial crisis sparked seven years ago by the collapse of Lehman Brothers Holdings Inc when many developers had a hard time borrowing funds.

Its first US office project was a building at 10th Street in Washington, DC, which cost about US$85 million to develop and sold three years later in 2012 for US$140 million.

Reis forecasts 3.6 per cent office rent growth in 2016, the highest since 2007, and expects vacancies to fall to the lowest level since 2008. Economic growth and demand for office space fuelled by the expansion of technology companies in cities such as Seattle and San Francisco has made it harder for Skanska to find land at reasonable prices.

"Some of the fantastic projects we did in the beginning will be hard to repeat," Mr Johansson said. "It's not impossible in any way. It's just more difficult." An exception to growth in US office space may be Houston, a market reliant on the oil and natural gas industry which is experiencing a slump due to the crash of crude prices. "The market is in a wait-and-see mode in Houston," Mr Johansson said. "There's really no reason to do anything but lay low at the moment."

Skanska aims to record gains of some 1.5 billion Swedish kronor (S$254.5 million) to 1.6 billion Swedish kronor this year from divestments in its commercial property unit, up from a five-year average of 1.4 billion Swedish kronor between 2010 and 2014. BLOOMBERG