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Dive brief:
- Skanska’s fourth-quarter operating profit fell roughly 73% year-over-year on slightly higher revenue, largely due to negative impacts on the Sweden-based developer and builder’s property portfolio, the company announced on an earnings call Friday.
- The contractor reported profits of 957 million Swedish kroner ($91.5 million) for the fourth quarter and 3.2 billion kroner for 2023, a 65% drop from 9.3 billion kroner in 2022.
- Last month, the company announced 2 billion kroner in impairment charges in its commercial real estate development, residential development and investment properties. However, company leadership remained upbeat on Friday’s earnings call, pointing to continued strength in construction jobs and the company’s financial position.
Diving knowledge:
While US construction bolstered Skanska’s year-end balance sheet, the commercial leasing market in the states was a drag on the company’s performance. Last month, President and CEO Anders Danielsson called the U.S. commercial real estate sector the “weakest market right now.”
Infrastructure work in the US has particularly helped the company, contributing to a portfolio of 229.6 billion kroner, maintaining a record high in recent times. In the United States, Skanska had 27 billion crowns to book for the fourth quarter, more than half of the period’s bookings, recording about 21 months of production on hold.
“The [construction] The markets we have today, both in the civil and construction parts of our operations, are probably the strongest markets we have in the group,” CFO Magnus Persson told Construction Dive on a call Friday. “There are lots of jobs, prices are good and we also see and expect these markets to be good for quite some time. There are no signs or indications of this abating.”
Property issues
When it comes to the divestment market, Persson said the company will likely need to see lower interest rates to attract investors, and even that could take time to recover. On the capital market side, leasing has remained sluggish, largely due to low US office return rates since the COVID-19 pandemic.
“I don’t think we will return to the same market we had, for example, three or five years ago in one or two years. I think that would be too optimistic. It might take some time,” Persson told Construction Dive.
Most of the company’s assets in the commercial sector are Class A properties, which Persson said is a difficult market to read because the assets are valuable, but finding the right tenants can be a challenge.
However, last month Skanska signed the largest lease in the company’s history when an undisclosed tenant leased 526,595 square feet at The Eight near Seattle.
“It really shows the value of having these Class A properties in the right location. Then we’re going to attract the best tenants and they’re willing to pay very competitive rents for these spaces,” Persson said.
The deal was due in the first quarter of 2024. But last year, the company had to take several defensive actions in the leasing market, Danielsson said. This included pulling out of geographies with poor residential development markets and reducing the number of employees in that part of its business.
Despite the impairments, Skanska started three commercial real estate development projects last quarter.
“We are in a position where we can start projects when we think it’s right. When we see that we have the right product in the right location and we believe in the market going forward,” Danielsson said on the call. “We’re determined to maintain that position.”
