Rental Industry Struggling, But Still On Solid Footing

Drive past most any construction site, and there’s a good chance many of the machines working there are rented, clearly marked by decals of the rental company that owns them.

Most construction specialty niches rent equipment, including utility providers and contractors engaged in underground utility construction. Trenchers, compact excavators, tractor mounted loader/backhoes, skid-steer loaders, air compressors, pumps, and hand-held compactors and tampers are among the most popular rental items by those engaged in underground construction.

Clearly the rental industry has been affected by the current recession, and both the large rental chains and independent rental centers have not replaced equipment in their fleets at regular intervals as they have in the past. That loss of sales to the rental market over the past two years has severely impacted manufacturers serving that market.

All of which begs the question: is the equipment rental industry coming out of the recession? Underground Construction asked Christine Wehrman, executive vice president and chief executive officer, American Rental Association (ARA) to share her views on the state of the rental industry at the mid-year point of 2010.

“Broadly, we can say that the equipment rental industry has weathered the challenging economy better than many industries,” believes Wehrman. “That’s not to say the year was a walk in the park by any means. It was a tough year and there was negative impact. It has been very difficult for a number of companies, depending on the inventory mix, the market they operate in and company management.”

Christine Wehrman

Overall, Wehrman continued, equipment rental revenue is down from its peak, but the decline in rental revenue has not been as severe as for the industries rental companies serve, such as the overall construction market.

Early reports
At ARA’s annual convention and trade show in February 2010, Wehrman said many exhibitors reported a good amount of sales and leads for a variety of equipment.

“Many rental companies,” she said, “suspended or reduced capital expenditures last year because of the economy. As their equipment ages, it needs to be replaced and that’s part of what’s happening now, coupled with much more optimism that business will improve this year and continue to grow in 2011, 2012 and 2013. What often needs to be replaced in inventory first is compact equipment that usually has a shorter lifespan than larger machines. We are not yet seeing as much activity related to buying large construction equipment, which requires more capital expenditure, but ARA surveys indicate more optimism from our construction members. They expect revenues to start to build in 2010 and to continue on an upward trend. We continue to have opportunity for growth.”

Wehrman said ARA estimates that rental revenues for construction and industrial rentals declined about 21 percent in 2009 and may show a further decline through the end of 2010. However, she said equipment rental is expected to be one of the first industries to recover and build volume because construction companies and contractors may be inclined to rent equipment rather than purchase equipment as they bid and win jobs.

ARA does not yet have specific information about what types of equipment are most in demand this year, Wehrman said.

“Anecdotal evidence we get from ARA members is that seasonal lawn, garden and landscaping equipment did well in the spring,” she continued. “With the flooding in the Northeast, many rental stores were renting a lot of pumps and dehumidifiers. We do believe that continued broadband deployment can result in more use and rentals of underground utility equipment like trenchers and excavators. The stimulus bill provided funding for expansion of broadband, and certainly this work can increase rental volume.”

Wehrman said ARA’s research partner IHS Global Insight says the federal stimulus package offers much larger injections in 2010 compared to 2009.

“It is hard to quantify if stimulus funds have increased demand for rental equipment yet,” Wehrman said. “Anecdotally, comments we hear from members indicate that any benefit has been limited, at best, and disappointing to date. While more dollars will go into construction, their use is still to be defined. Long-term, funding for the highway bill is critical in this matter.”

2011 turnaround
When it comes to construction, Wehrman said IHS Global Insight doesn’t expect to see a turnaround until early 2011. However, she believes that doesn’t mean prospects for equipment rentals are less.

“A variety of factors can impact equipment rental,” she explained. “For example, contractors and construction companies might be more inclined to rent than buy equipment for any jobs that come up between now and the end of the year. As the economy and construction industry recover, equipment rental companies can benefit when those who presently own their own equipment or have owned it in the past need extra machines to handle extra work, but may not be ready to buy more machines because of uncertainty in the marketplace. IHS Global Insight is forecasting double-digit growth for the construction and industrial equipment rental segment for 2012 and 2013.”

For more the 60 years, the American Rental Association has effectively represented the rental industry on behalf of rental businesses, suppliers and manufacturers who serve construction and industrial, general tool rental, and party and event markets. ARA members, which include more than 7,500 rental businesses and 1,000 manufacturers and suppliers, are located in every U.S. state and Canadian province and more than 40 countries worldwide. ARA headquarters are in Moline, IL.

“The ARA continues to closely monitor all economic factors that impact our rental members and industry partners. The association is deeply involved in Washington, D.C., on issues such as infrastructure and transportation spending. We support swift passage of a fully funded, multiyear reauthorization of the federal surface transportation programs. ARA is a strong advocate for our membership on pro-business issues. We believe in public policy that supports the opportunity for business success and building a strong economy in America,” concluded Wehrman.

Equipment Rental Sources
ARA members include big rental companies with multiple stores who specialize in construction equipment and independent rental centers who typically offer compact construction equipment, pumps, air compressors, compactors and tools.

However, horizontal directional drills and vibratory plows are not widely available from traditional rental sources, but are available from equipment dealers and distributors and sometimes directly from the manufacturers. Therefore, statistics developed from data gathered from ARA members are not included in information provided by ARA.

Rental is an important source of income for many equipment dealers, especially when sales are slow, and offer the opportunity to make rent-to-buy deals. Equipment dealers also are a source for horizontal directional drills, vacuum excavators, vibratory plows of varied sizes and trenchers larger than non-specialist rental centers offer.

Research Firm Looks at Equipment Rental Market
The American Rental Association ARA) has worked with IHS Global Insight to develop research and reports about the rental market.

Earlier this year, ARA’s monthly magazine published a question-and-answer interview with Scott Hazelton, IHS Global Insight director, business planning solutions.

Highlights of Hazelton’s comments are summarized below:

“Construction and industrial equipment rental revenue depends upon construction spending and industrial production. Various rental companies have product lines that might be geared toward specific sub-segments, such as industrial plants and highway/street/bridge construction. In general, residential construction is not that relevant to construction as it needs less machinery than other construction segments and rental has lower penetration.

“The general tool segment also relies on industrial production and construction spending, but here there is a higher influence from residential construction. This segment should outperform the construction and industrial equipment segment in the near term as residential construction sees the beginning of a recovery.

“The key is nonresidential construction spending and the composition of this spending changed in 2009 and will remain so through 2011. In particular, commercial construction — retail, lodging, warehousing and office buildings — is in dramatic decline. Institutional construction — hospitals, schools and government buildings — is less impacted and growing in some areas as stimulus funding provides a boost. Similarly, infrastructure spending will have more importance over the next year or so as publicly funded construction gains share from privately funded buildings.

“From a timing perspective, a return to gross domestic product (GDP) growth at the end of 2009 would suggest an improvement in employment in mid-2010 and a recovery in construction spending in early 2011. Analysts also look to 2011 for real improvement based upon financial markets. Home foreclosures remain very high and bank credit standards are still tightening modestly, although moving toward neutrality. While housing is improving, it will be some months before housing starts take off in a big way. The key is employment — no one wants to make a major financial investment when they are unsure of their job. Once employment grows again, housing will take off. When it does, home prices will begin to increase once again, helping households to rebuild wealth. With consumer and business confidence badly shaken in this recession, the confluence of events in employment, finance, housing and construction is going to take time to improve, but is expected to happen in 2011.

“Things are improving now. It’s just hard to see it in our industry. Business capital spending is increasing already and doing so at strong rates. The issue is that it is happening in computers and other productivity-increasing technology, not in building materials, equipment and structures, which are more important to the equipment rental industry.”

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