For a while, I was wondering what was more impossible, the politicians in Washington coming to a resolution over the fiscal cliff, or the owners and players coming to a new Collective Bargaining Agreement in the National Hockey League. Turns out the politicians in Washington found two groups more intractable than they are, although the NHL finally hammered out a deal.
As for the fiscal cliff, there are still a lot of unresolved issues that will have to be dealt with sooner rather than later, many of them quite complex, but hopefully none will derail the economy and what seems like a pretty decent head of steam in the rental business going into 2013. I interviewed about 50 rental people and manufacturers for the cover story in this issue and found that almost everybody is quite optimistic going into 2013. The election is out of the way, the fiscal-cliff precipice isn't quite as terrifying at least for the moment, construction is coming back to some degree in residential and non-res., and the energy markets remain strong sources of rental activity, although obviously not all rental companies can benefit from them.
More significantly, most of the rental people we interviewed for this issue said their customers were optimistic going into 2013 and that's the key to it all, the basis for rental industry optimism. Customers appear to have work on the books and with that, the rental industry can move.
We're likely to still see a lot of contractors struggling to pay in the coming year. Some rental people point out that most of the contractors that are still in business are in decent shape, otherwise they wouldn't have survived, but still many were hit very hard. As business improves, one would expect they'll be in better shape when it comes to paying. But many contractors are also facing greater fiscal pressure than before the recession, and receivables will still be a challenge.
With the expectation of being reasonably busy and still a pretty good bit of old iron in rental fleets, I would expect the upcoming rental show to be a pretty good buying show. Credit and financing won't be as restrictive as they were a while ago and the combination of replacement needs and potential growth fleet should create solid demand.
One concern that came up frequently in conversations is the rising price of equipment. That's an issue we'll take a look at more closely over the course of 2013. I've heard some wild numbers thrown around about how much the cost of equipment is likely to go up as a result of Tier 4, but whatever the numbers, they will be hard for rental companies to absorb, especially those that are undercapitalized or still struggling to get out of the recession's trough.
Hand in hand with the issue of rising equipment costs are rental rates. How can a rental company pay significantly higher equipment costs without passing some of those costs onto their customers in the form of higher rental rates? At the same time, how can rental rates increase to the same degree as those equipment costs? Not very easily and obviously a rental company can only raise rates so much compared to its competition. And, as Mike Rooney of Worldwide Equipment Services points out, if he's renting a five-year-old scraper and competing against a dealership renting equipment with the plastic still covering the seat, how can he charge a higher rate than that dealer does? It's not easy.
Favorable to rental is the fact that the cost of buying equipment will rise for the end user as well, so rental will continue to make fiscal sense. The rate of rental penetration is increasing, just as costs are. With more companies renting, there are more customers and a larger rental pie to share. If Frank Manfredi is right — and he is usually pretty close — the rental industry will rise to about $32.6 billion in 2013, after dropping to about $21.6 billion in 2010 (Check out his article on page 32). That's about a 51-percent rise in three years, so although we still haven't gotten back to the peak of 2007, the trend would suggest we'll reach it in a couple more years with more industry growth to follow.
So you're probably going in the right historical direction if you're in the equipment rental business. Manfredi predicts double-digit rates of growth in the rental industry through 2014 and perhaps beyond, and several factors indicate “beyond” is pretty likely.
