RE-RENTALS: WHY A (VERY PROFITABLE) LINE OF BUSINESS REMAINS LARGELY UNTAPPED
An Expanding Market: The already vast market for rented equipment is expected to grow dramatically over the next several years. The North American rental market is expected to reach $51.7 billion by 2016 (an increase of 50% over 2012).
Growing Profitability: According to the American Rental Association’s “Rental Equipment Penetration Index,” rented equipment now accounts for over 50% of the market (up from just under 40% in 2005), and according to Rouse Analytics, equipment utilization rates are again approaching 70%, and perhaps most encouragingly, current rental rates around the country are up between 4.5% and 7.9% year over year.
Staying Power: A number of reasons for such impressive growth in the current tepid economic environment have been cited, but three seem to stand out:
- The residential construction market is rebounding (2013 permits are up over 81% since their low point of 337,000 in January of 2009 according to the U.S. Census Bureau);
- Contractors appear to have discovered renting as a viable alternative to purchasing equipment and have become much more aware of the advantages of renting (i.e., limited capital outlays, lower total cost of ownership, a wider range of available equipment, added flexibility and greater efficiency);
- The lack of visibility created by the current tax/regulatory environment weighs heavily in favor of renting (e.g., bonus depreciation and IRC §179 deductions will end or be substantially curtailed at the end of the year, a host of new taxes and tax increases will come into effect in 2014, and Tier 4f regulations will take effect for 174 to 751 hp diesel engines in January of 2014, prompting many potential buyers to delay purchases until at least a measure of performance data become available).
Looking Ahead: What does all this mean for equipment dealers and rental industry participants in the coming two to three years? At least three things in my view:
- The equipment rental market may grow (much) faster than anyone anticipated;
- Utilization rates, already nearing their historic highs, can’t go much higher, meaning different types of equipment may be in short supply or simply unavailable in some areas;
- Rate increases will continue to outpace inflation as a result of the increase in demand and limited availability of equipment.
Where to Find More Equipment: Ironically, equipment dealers, whose sales were decimated in the economic downturn (falling over 66% from peak to trough between 2006 and 2009) continue to maintain substantial inventories of new equipment despite a lukewarm sales outlook for 2014 (up 5% for light equipment and down 5% to 10% for heavy equipment according to Longbow Research). The result; growing fleets of idle inventory at the dealer level are motivating them to explore options for generating revenues through rentals.
It’s Not That Easy: As most rental operators can attest, renting equipment is a complicated business. In fairness, the selling process is as well, but the two almost couldn’t be more different. Equipment mix (deciding what and how much to include in a given rental fleet), maintenance schedules, use and location monitoring, customer use and safety training, service requirements, repairs, and recoveries, not to mention taxes, accounting policies, insurance, marketing, staffing, customer relations, and contracting all require very different knowledge bases from those required in the sales arena. And of course, getting it wrong, even once, can be enormously expensive, a fact that has compelled many dealers to forgo the (potentially profitable) effort altogether.