Rental Revenue and Rental Rates Strong in Q3, Baird/RER Survey Shows

Rental equipment demand was healthy in the third quarter of 2017, with rental revenue growth returning to the 5 to 6 percent range experienced during 2015 and the first quarter of 2016 according to a quarterly survey conducted by Robert W. Baird Associates and RER. Pricing (rental rates) shows signs of improvement for the second quarter in a row following eight consecutive quarters of flattish rates. Utilization up strongly, likely impacted by pent-up demand following an unusually rainy spring. Anecdotal commentary pointed toward continued strong construction demand and improved oil-and-gas activity.

Average rental rates increased 2.6 percent year over year in the third quarter 2017 compared to +9.6 percent in the second quarter and +6.4 percent in the first quarter. Each quarter of 2016 showed growth between 5 percent and 6 percent.

Average rental rates increased 2.6 percent year over year in the third quarter of 2017 compared to 2.6 percent in second quarter of 2017. The previous eight quarter had a range of -1 percent to +1 percent. Price competition remains at larger firms but improved demand is helping.

Fleet utilization is up more than 1,000 basis points sequentially and year over year to 62.7 percent, driven by healthy end markets, pent-up demand from a rainy spring, some incremental hurricane-driven demand and a higher mix of respondents with exposure to heavier equipment, which tends to have higher utilization rates.

Unit sales were down 1.5 percent year over year in the third quarter, lower than Q217’s 3.6-percent gain. Growth in the cost of new units increased 2.9 percent, less than last quarter’s 3.5-percent gain.

Average fleet size (in units) grew 8.9 percent year over year in the third quarter, the largest gain in the survey’s history. Fleet growth is higher than revenue growth and may inhibit further rental rate improvement. Fleet growth was also directionally consistent but was stronger than recent equipment OEM sales/order trends.

Respondents expect second half growth of an average of 5.4 percent. They expect a 4.5 percent increase in fleet purchases during the next six months, down from the 6.5-percent forecast last quarter. Big Iron Earthmoving Equipment is expected to increase 2 percent, and Big Iron Access Equipment is expected to grow 4 percent. Rental rates are predicted to increase 2.3 percent in the second half of 2017.

Top business risks in the second half are expected to include a change in rental rates compared to the cost of new equipment identified as top second half business risk by 25 percent of respondents, followed by government regulations, weakening end market demand and higher interest rates.