The future looks bright for development and construction, especially in the infrastructure, health care and education sectors, says Skanska USA’s new president and CEO, Rich Cavallaro.
A New York City native, Cavallaro took over as CEO on Jan. 1, replacing Mike McNally, who retired after 16 years with Skanska. A New York City native, Cavallaro joined Skanska in 1996 as an estimator after graduating from the City College of New York. His first major field assignment was on the $1.2 billion AirTrain to John F. Kennedy International Airport. From there, he worked his way up to become the CEO of Skanska USA's civil, power and industrial construction division.
NREI spoke with Cavallaro about what he sees in Skanska USA’s future as a $7 billion development and construction company. An edited transcript of that interview follows.
NREI: Which commercial sectors are seeing the most projects right now, and in which markets?
Rich Cavallaro: Health care, in particular, is growing rapidly with trends like net-zero hospitals and incorporating the “patient experience” into the design of new hospital facilities. We see growth in education facilities (K-12) because municipalities that are growing and have found ways locally to fund the construction.
Lastly, the demand for public-private partnerships for infrastructure is fueling construction growth in the U.S. As the U.S. is being re-industrialized, we see this trend continuing for many years. Public-private partnerships—P3s—are driving projects in the infrastructure sectors. We also see an opportunity for P3s to drive social infrastructure projects, such as schools and hospitals, which are both in high demand.
NREI: How is the rising cost of construction materials impacting development and construction?
Rich Cavallaro: The truth is that it never gets less expensive to build. While large-scale projects often have large price tags, we work with customers and design firms to determine the most cost-effective design solutions and construction means and methods to meet the customer’s needs and give them the best value for their funds.
But even as materials costs are going up, construction and development planning hasn’t tapered off yet, thanks to a good economy. In the infrastructure market, the biggest concern is there is not replacement for the Infrastructure Bill and plans to fully fund or renew the Highway Trust Fund. Without those in place, states simply cannot build the infrastructure they so desperately need.
NREI: Generally speaking , are construction and development companies in expansion mode again? They had cut back significantly during the recession.
Rich Cavallaro: As an institutional builder, we weren’t hit as hard as some other construction and development companies during the recession. In fact, our company was able to sustain steady growth during that time. Construction work and lending for commercial and residential development is increasing, and that uptick means increasing competition for us—for both new construction and development projects, and people.
For some of our projects, we have been recruiting well in advance of construction to ensure that we have a strong, reliable team, since demand is high. For example, at Florida’s I-4 Ultimate, we are widening and reconstructing 21 miles of interstate highway, which is a huge undertaking. We wanted to make sure we have skilled workers that will successfully complete the project, so we started the recruitment process as far back as last fall for work that started in the first quarter of this year. Construction and development is definitely on the rise again. We were recently named one of Forbes’ 500 best employers, coming in as the top construction and development company, which we anticipate will assist in recruitment efforts.
NREI: How are public-private partnerships impacting development and construction?
Rich Cavallaro: Right now, U.S. infrastructure, from our roads and bridges to our water systems, is in great need of investment. P3s will be essential for fixing this infrastructure. There is such a tremendous need for repair and little public money to pay for it, and meanwhile there’s plenty of private money on the sidelines waiting to be invested. P3s make these projects happen. They leverage available public funds with private sector investment to generate critical infrastructure projects more quickly, efficiently, and with a focus on the asset’s entire life cycle. I’m proud that Skanska is a global leader in P3s, having delivered 31 such projects in eight countries using more than $500 million of our own equity investments. Right now, P3s are helping fill the gap created by a lack of an infrastructure funding bill, but P3s by itself is not enough. We need a reliable funding source because the needs far outweigh the available capital.
NREI: Could you comment on the dispute and settlement between Skanska and Forest City Ratner regarding the misalignment of modular units at Pacific Park Tower? As I understand it, Skanska considered the plans flawed, and Forest City blamed Skanska for the problem, but agreed late last year to buy Skanska out of its stake in the modular company that was producing the units. Will Skanska avoid modular construction in future?
Rich Cavallaro: Our company’s commitment to innovation is unwavering, and that means continuing to pursue and invest in prefab, modular, integrated project delivery and whatever other innovations and technological advancements will improve the way we have been building for the past hundreds of years. The commercial and design issues we faced in our joint venture with Forest City Ratner were specific to that project and partner. We will continue to look for the right opportunities for modular in the future.
NREI: With increased domestic energy production changing the power and industrial industries, is this having any direct impact on the construction industry, say, with materials being manufactured?
Rich Cavallaro: Increased domestic energy production is definitely impacting construction. Not only has there been a jump in the demand for new energy plants—which calls for construction projects and ultimately brings job growth—but sustainable energy is on the rise, affecting the types of projects we work on. Additionally, the low cost of energy, combined with tightening federal emissions regulations, is prompting many utilities to upgrade or replace older power-generating stations, so we are seeing more work in that sector, too. Lastly, the U.S. has become an attractive location for industrial plants that use large amounts of energy in their process, so we see opportunities in the industrial downstream space, although this is somewhat tempered by low oil prices.
NREI: Any other key trends for development and construction?
Rich Cavallaro: More people are moving to cities, and that trend continues. This urbanization trend creates a strong demand for construction and development services. We have been seeing growth in many transportation-oriented projects, especially surrounding bridges, tunnels and rail transit. Bridges, tunnels and toll roads, in particular, are often supported by P3s, which is helping fuel the number of projects. Right now, our bridge projects range from restoring the 106-year-old Longfellow Bridge in Boston to replacing more than 75 bridges for Florida’s I-4 Ultimate, and we anticipate more to come. For one of our numerous rail transit projects, we are constructing a 6.7-mile light-rail train through downtown Los Angeles, which is expected to have a daily ridership of 64,000 by 2030. Additionally, power projects are on the rise, especially as renewable energy is increasingly prioritized.