The rental market reacts to the recession
|Photo Courtesy of RSC RENTAL.|
|As the construction market has slowed, so too have equipment rentals. The industry hopes that the recently passed stimulus bill will helpspur a rebound.|
The traditional reasons for renting equipment rather than buying—lower capital outlays, decreased maintenance costs, etc.—still make sense in this current economic downturn. In fact, they might make more sense than ever, but that doesn’t mean there’s been a rush to rental counters around the country.
“We are seeing a decline in the overall rental revenue in North America,” says Tracy Johannsen, public relations and advertising manager with the American Rental Association (www.ararental.org). “A lot of that has to do with overall housing starts being down, along with large industrial projects. The entire construction market is really down, and that accounts for the largest portion of the rental market in North America.” She says that homeowner and party/event rentals have also slowed, but not at the same rate as construction equipment rentals.
While the slowdown has been industrywide, Johannsen says that rental businesses in certain geographic areas—notably portions of the Southeast and Midwest that are experiencing higher unemployment—have been hit harder than others. “Then there are areas, such as Texas and Louisiana, where they’re not seeing much of a decline at all,” she explains, adding that geography has been a bigger factor than the size of the rental business in how hard companies have been hit.
The ARA reports that the decline in rentals has resulted in less equipment purchasing on the part of rental companies. “Our associate membership, which is essentially equipment manufacturers, is also seeing a decline in sales. And, that is partly because our rental businesses don’t have the money to purchase because they are not renting as much equipment out to consumers. It’s very circular,” says Johannsen. Because rental companies are purchasing less equipment at the moment, some are keeping their existing equipment longer than they normally would, she adds.
Johannsen says that the federal government’s recently passed economic stimulus package has been well received in the rental industry, and there are hopes that some portions of the stimulus plan will help rental companies to rebound. “We’re hoping that portions of the stimulus, such as tax incentives and depreciation rules, will help them invest in new equipment, and the infrastructure components will spur construction. We’re forecasting that the rental industry will start to experience a rebound in late 2010 or early 2011, with a full recovery by 2012. Obviously, by that time, the rental companies will be looking to turn their fleets around and invest in newer equipment.”
There’s no denying that, at the moment, things are slow. Lee Bledsoe, rental market development manager with Caterpillar, Inc. (www.cat.com), confirms that, “Overall, utilization measures for rental equipment in the Cat Rental Store network have decreased over the past several months as construction activity has slowed dramatically.”
Cat Rental Stores are all independently owned and operated by Caterpillar dealers, Bledsoe points out, so the managers at the individual locations are “keenly aware of their local market conditions” and are making operating adjustments based on local rental demand. “Cat Rental Store Managers are taking decisive actions to right-size their fleets during this economic downturn, which includes reducing fleet investment and aging their fleets, which continues to be the youngest fleet in the industry,” he says.
|Photo Courtesy of Caterpiller.|
|With credit hard to come by in some areas, renting can be an attractive option for thosereluctant or unable to finance new equipment purchases.|
The current availability of deals on equipment, as well as low interest rates, may entice some stores to purchase new equipment even in a slower rental market, but those investment decisions are dictated primarily by local market conditions and customers’ needs rather than the availability of sales or special financing packages, Bledsoe explains. And, he emphasizes, as locally owned businesses, CAT Rental Stores are able to meet the different needs of their customers; an important fact because the needs of the customers may be changing with the economy.
Heather Schlichting, corporate communications specialist with RSC Equipment Rental (www.rscrental.com) agrees that the rental industry slowed in 2008, but she points out that the rentals declined less than sales of new equipment. So, “in effect, rentals are gaining market share.”
While the tough economic environment has driven many product manufacturers to slash prices in hopes of driving sales, the rental market is in a different position, says Schlichtin. “Demand for rental equipment is not elastic; demand is driven by number of available projects, so lowering prices does not make a lot of sense.”
Like the contractors it rents to, RSC is basing its own equipment purchasing decisions on economic forecasts for the months ahead. “RSC will likely buy less equipment in 2009 than we did in 2008 if demand continues to soften,” explains Schlichting. She adds that while interest rates are currently low and many manufacturers are offering discounted prices on products, these factors “are not important considerations.” The simple fact, says Schlichting, is that “we do not buy what we cannot rent.” So, as long as demand for rental equipment is down, orders for new equipment from rental companies are likely to lag, as well.
That said, Schlichting says that RCS “takes a long-term view” in managing its equipment fleet, factoring demand over time rather than letting the current economic cycle dictate all decisions. “We also move equipment between regions to maximize their use,” she explains. “Types of equipment that see reduced use are typically sold.”
Finally, Schlichting points out that the economic slowdown does present opportunities for companies to improve. “Cost control will be important to stay financially healthy,” she says, “and now is also a good time to gain market share by understanding customers’ needs and providing excellent customer service.” That’s good advice for everyone these days.
Top Pieces of Rental Equipmentin the Landscape Industry
Courtesy of www.LawnSite.com.
A good credit profile is an important business asset anytime, but especially during an economic downturn, when businesses are more cautious about extending credit. “I think it’s safe to say that rental companies are being more careful with their credit customers,” says Wayne Walley, editor of the American Rental Association’s Rental Management magazine. “Many are paying much closer attention to accounts receivable, trying to improve collections and stay in contact with customers who have past due balances,” he explains, adding that many rental companies report that “they are patient as long as communication and effort by the customer is apparent.”
Rental Management recently carried an article covering how rental companies were adjusting and managing in the difficult economy. One rental company profiled reported that it had begun requiring customers to provide a nonrefundable deposit (via credit card) up front. “Another says it now calls late-paying customers and records the date of the reply,” Walley adds. “If the customer doesn’t follow through on what they say they will do to pay, then they are put on ‘cash-on-delivery’ status. Some rental companies also said they are calling on accounts receivable before they are 30 days past due.”
Walley concludes that each rental company will likely chart its own path as far as deciding how to handle rental requirements and credit issues. “It would seem that a customer’s relationship and past history with a rental company also comes into play,” he states.
Jerry Jones, president of Environmental Landcare (www.elandcare.com) in Thousand Oaks, Calif., says his company follows a business practice that allows it to continue renting equipment even in slow economic times. “We always require the customer to pay for the service we provide in progress payments,” he explains, “so all materials and equipment are paid for up front as the job progresses.”
Jones says that the current state of the economy is making equipment rentals—already attractive in certain cases—more attractive. He believes that, “Renting equipment is usually the best way to go unless you frequently use a specific kind of equipment: i.e. skid loaders, rototillers, trenchers, etc. If you rent the equipment, all the repair costs and out-of-pocket expenses (a.k.a. cash flow) are not tied up in loan at the bank.” That’s especially helpful these days, says Jones, because “lenders are now far more stringent on their lending practices, making it more difficult to obtain an equipment loan.”
Patrick White is a freelance writer and editor who has covered every aspect of the green industry in the past 13 years. He is based in Middlesex, Vt., and is always on the lookout for unusual stories.