In a mid-December 2024 interview, Mircea “Mig” Dobre, senior analyst - machinery & diversified industrial institutional equities & research, Robert W. Baird & Co., talks with RER about the economy in 2025, nonres and residential construction, public versus private, what we know and don’t know about Trump’s policies, the opportunities and obstacles ahead and how they will affect the rental industry.
RER: What are your expectations for the overall economy in 2025, especially in regard to construction? According to the most recent note Baird published, the pace of growth will be slowing down some.
Dobre: The economy seems to be on pretty firm footing here going into 2025. All major indicators for activity seem to be pointing in the right direction, with the one caveat that manufacturing is where we’re seeing more of a struggle. And in the last couple of years, we’ve seen negative TMI (Trade, material and equipment) readings, but that is likely going to turn around in our view in 2025. The construction side of the economy is a little bit different because construction is fundamentally a backlog business, especially when you look at non-residential construction. And after some very strong years in 2022 and 2023 and the first half of 2024, we’re now starting to see the slowdown that’s related to the depletion of backlog at work. That has occurred due to multiple reasons but primarily because of higher interest rates and because the cost to build a building has increased as much as it has: More than 30 percent relative to pre-Covid levels. These are all effects that take a little bit of time to play through. But now we’re starting to see those effects.
Our view is that residential markets are going to be positive in 2025 and grow mid-single digits, largely a function of single-family homes where demand is still starting to recover. And should we see lower interest rates that are going to accelerate that recovery. But even at current levels we’re starting to see better activity on the single-family residential front.
Multi-family is still struggling, still declining and likely to continue to do so in 2025 with a recovery in 2026. The public side of non-residential construction, that would be everything that is municipal, and larger infrastructure projects like road and highway, also is likely to continue to grow next year, probably around mid-single digits, which would be a little bit less than what we’ve seen in recent years. But that’s because a lot of the funding on infrastructure that came from the federal government is starting to mature. So, we’re seeing continued growth there with the partial offset from private non-residential construction. And private non-residential construction as you know is very important to equipment rental companies. And that’s why we have a more guarded outlook for equipment rental in 2025 reflecting the dynamic that private non-residential building is going to slow. Frankly it is going to be negative. And fleet operators might find themselves with excess fleet. How they manage that dynamic, making decisions around fleet, probably pulling back on capex, that’s going to be really important in ensuring how they maintain utilization and pricing.
That could lead to more consolidation on the rental side.
I think that’s a great point. Consolidation is very much likely to continue.
As far as big mega projects, what do you see?
Once again, it’s private versus public. Public mega projects are happening, and they are going to continue to happen for the next five to seven years. A lot of the funding that is associated with the Infrastructure Investment and Jobs Act, that large bill, only about 50 percent of the funding has been committed. There’s still more to be committed; less than 50 percent has been spent.
But when you think about growth, it’s important to recognize that there’s an initial bump with growth that comes from funding like the IIJA starting to be dispersed. But that growth starts to plateau after a couple of years, and you end up with higher spending for longer. Not so much higher growth, but just a higher base level of spend, and activity that’s sustained for multiple years. I think that’s the stage that we’re in from a public mega-project standpoint, where we might not see the 20-percent type growth that we have seen in years past but what we’re going to see here is more sustained long-term funding. So rental operators are to varying degrees exposed to these public markets, they typically do more private work than public infrastructure. But to me at least the public infrastructure market remains an area that operators should consider especially when they’re thinking about investment, whether it’s in fleet or in M&A, since this is likely an area where we’re going to see higher spending for longer.
On the private side of mega projects, the outlook is a little more cautious simply because manufacturing starts have been negative. So, what we have seen is a wave of very sizable investments in manufacturing specifically As a result, we’ve seen a pullback in the amount of manufacturing projects being started, or call it a normalization if you would, in 2024. And we think that’s going to carry that activity into 2025. Because the projects that you start in 2024 tell you what activity is going to look like in 2025, and it looks like that manufacturing activity is slowing down from very large levels that have occurred in the last couple of years.
So that’s how we think about mega projects. The public side seems to be more stable than the private side. One question that is very difficult to answer right now is obviously what does it mean for 2026 and 2027?
The [incoming] Trump Administration is very much focused on investing in domestic production and domestic manufacturing, so what remains to be seen is what sort of incentives they’re going to provide for various industries to relocate their facilities to the United States and the timing behind that. It is conceivable that with the right sort of policies that we could once again see a re-acceleration in mega project manufacturing construction spend in 2026 and even more so in 2027, so we’ll stay tuned for that. It's too early to have a clear view there.
How about some of the markets such as petrochemical, electric vehicles, solar?
Once again, these become policy questions. We’re not even to the point where the new administration has settled in, there are still a lot of unknowns. But what’s been clear from President Trump’s rhetoric, he is looking to operate under certain components of the Inflation Reduction Act. I think that creates quite a bit of uncertainty if you’re a private operator that is looking to invest in clean energy whether that’s solar or wind or electrification in terms of constructing EV battery plants or developing the charging infrastructure. Without a doubt you want to know about policy. A $7,500 tax incentive for electric vehicle purchases throws a bit of a curveball for a lot of automakers. My view is the most likely outcome here is at the very least you’re going to see a pause for the next 12 to 18 months as these industries are trying to recalibrate the new administration’s intentions and the degree to which those intentions will affect their businesses.
In oil and gas and petrochemical, I guess the opposite would be true there. But the challenge with oil and gas is, if you look upstream we’ve really seen soft breakdowns in growing activity. It’s not likely that that changes unless we’re dealing with materially higher crude prices. So, unless we see crude prices north of $85 or $90, and have those prices be sustained at that level, upstream activity is likely to remain very skewed. Where we could see more activity is going to be in the downstream space, and I’m thinking here very specifically in LNG (liquefied natural gas) and LNG exports as well as more pipeline and construction. Those could be areas of growth, but I don’t think it’s going to be immediate. This is probably more 2026, 2027 business, but is definitely an area for rental operators to keep an eye on.
What might be the impact of large tariffs that Trump is talking about? It could be rhetoric, but you never know.
“You never know” is the right term. It’s hard to know. What I can tell you is we recently hosted our Baird Industrial Conference, which gathers more than 200 executives from top industrial companies from around the country and the prevailing consensus among this group was that tariffs are really a negotiating tool. They’re not taking this discussion verbatim but they’re rather thinking through what negotiated outcomes might come down the line. So, in some ways we think of it as “we’ll believe it when we see it.” And the stock market will broadly tell you that there has been less negative reaction around the headlines generated than what we have seen during the first Trump term.
But tariffs would be an issue if they become implemented. At this point a lot of companies have had ample time to think through their supply chains and understand what exactly they’re purchasing from China, what they’re sourcing from China. The shock from any incremental China tariffs I think is going to be more muted than what we’ve seen in the past or what we would have seen eight years ago. But, and this is a big “but”, Mexico is a different story and Canada, the renegotiation of NAFTA in 2026 is a big question mark.
The potential of applying broad tariffs on imports from Europe is also complicated because all these trading partners are incredibly important for American companies. And while the rental industry is not directly impacted by this in terms of its activity, rental is really one of the areas that will not see any direct impact from tariffs -- it’s strictly domestic business -- there will be secondary and tertiary effects, right? There are going to eventually be impacts on equipment pricing. That will mean tariffs that the rental industry is going to have to manage through.
And mostly there’s going to be impact on how various project owners choose to invest. In some ways tariffs could be a positive for the ones that are going to re-shore activity back to the United States so you can say that that could be a stimulant for rental equipment demand. Alternatively, if tariffs become problematic from an economic perspective on companies’ margins and profitability, that could actually have a detrimental impact on investment. So, it’s a fair question that you’re asking but it’s very complicated to give an answer to particularly given how little we know today.
What about the issue of labor shortages, which obviously impact the customers of rental businesses? A potential large-scale deportation of undocumented workers could take a lot of construction workers out of the work force.
Yes, this could end up being perhaps a more important issue for the rental industry than trade and tariffs. I have seen various estimates as to how important undocumented workers are for the construction trade. There is quite a bit of variance geographically. For the states in the sunbelt in particular some of the estimates that I have seen are as high as 20 percent of the labor force is undocumented. A program that takes these folks out of the workforce is really going to be problematic for the contractors that are relying on that labor. And that’s going to create upward pressure on construction wages, so the economics of a project are also going to be reconsidered as a result. This has the potential to be a real shock. We’re going to have to see exactly how this is going to unfold.
What I’ve seen publicly said is that the focus near term is really going to be on undocumented individuals who have broken the law and committed crimes inside the United States. Presumably a lot of the folks who are working on a construction site are not doing that. In theory at least the near-term effects should not be there but if this becomes a broader theme in terms of deporting undocumented workers, then I think this is going to complicate matters. Bottom line here is going to be once again prices are going to have to go up and in an environment like that, that sort of raises questions once again about interest rates and whether or not we can actually see lower interest rates and a re-stimulation of construction activity if once again we’re dealing with higher prices and really tight labor. Big question not just for 2025 but for 2026.
Any thoughts about interest rates going forward?
Inflation has moderated, which has allowed the Federal Reserve to lower interest rates earlier in 2024. However, labor costs and manufactured goods costs, which could be impacted by tariffs, and which could be impacted by undocumented worker restrictions, those are items that are going to have to be considered by policy makers when they’re thinking about interest rates. What they cannot do is lower interest rates as prices are going up and rates are above normal. That creates an inflationary spiral that is really a tint of the 1970s and this is an experience that I don’t think anybody wants, certainly not the policy makers.
How are national rental players likely to do compared to small independent players, any thoughts about that?
Times are moderating for everyone. We’re going to see it in the upcoming RER/Baird rental survey, we’ll see what the outlook looks like there. But when you look at the most recent update that we received from Sunbelt Rentals, they essentially reduced their revenue outlook, they cut their revenue guidance, they also reduced their capex. And when you look at their capex intentions for their U.S. rental fleet, that decline is considerable, more than 40 percent year over year. So, all of this is consistent with the picture that I’m painting here that 2025 is going to be a more challenging year. Scale does matter, so the large operators do have an advantage, as your readers are well aware, and part of the advantage is also having the ability to capture more mega-project dollars. Because while we have less activity, we still have quite a bit of mega project activity out there, maybe not as much as in prior years but still quite a bit to go around. The national operators have the ability to be more significant players there.
You brought it up at the top of the discussion, M&A. I think this is going to be topical regardless of size. M&A can happen in the mid-portion or even the lower portion of the market, it doesn’t have to be just the national rental companies that are the acquirers. I expect that to continue. And frankly I expect to see more equipment dealers becoming more active and involved with the rental industry and build their own rental fleets. The data that RER compiles is incredibly useful in that regard. What stands out to me is that the Caterpillar dealers, when you take them in aggregate, have now become a top five rental house in the U.S. That’s remarkable, isn’t it? Also, EquipmentShare is an amazing success story with the amount of growth that they’ve been able to amass mostly organically, with a few acquisitions.
The final thought I would leave with your readers is that the rental industry is a cyclical industry as all your readers know and we’re coming off a couple of years that were just unprecedented in terms of how strong demand was. Exercising those muscles and knowing how to pull some levers on the cost side, making sure you focus on the free cash flow generation, and managing the leverage of the business, the debt flow of the business in a downturn, exercising those muscles I think are a good thing because that’s going to allow all these businesses to be better businesses in a future recovery.
And let’s be clear, there is going to be a reacceleration in growth. That might happen early in 2026, it might happen in the second half of 2026, we’ll see. All the policy dynamics will be determining factors as to how quickly is this reacceleration, but again managing through this valley and doing it well so that you’re well-prepared to take advantage of opportunities on the other side when things pick back up, that’s what folks ought to be focused on in the next 12 months.
How they handle the possibility of having a lot of excess fleet lying around is going to be a major issue.
That’s why I think you almost have to flip the switch from being in ultra-growth mode where you’re growing fleet as fast as you can and you’re growing your employee base to keep up with that, now you have to flip that switch in the other direction where you become a lot more focused on expense management and on cash flow, managing the debt load, and not getting over-extended, while at the same time preserving some optionality to be able to turn things back on when you’re starting to see signs of growth rate acceleration.
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Added Points from Baird Research Note
· Looking forward, we expect Private Nonresidential construction to decline 2.3 percent in 2025 and 0.6 percent in 2026 (our perspective is driven by leading indicators such as contracts/starts, ABI, etc., highlighting the lagged impact of higher financing rates and difficult comparisons in key categories).
· We expect Public nonresidential construction spending to remain healthy in 2025-2026, driven by funding from COVID relief bills (much of which expires in FY25) and the IIJA.
IIJA spending is now entering the middle innings, with approximately 50 percent of funds committed and only 29 percent disbursed. The pace is a grind, much slower than privately funded projects, which spiked manufacturing construction ~3x within the span of only three years; expect air pockets along the way (such as the slower YTD starts, which bear monitoring).
· As we look towards 2025/2026, we expect Highway/Bridge to remain stronger than Building nonresidential, buoyed by IIJA funding disbursement (YTD Street & Highway put-in-place value growth running ahead of Building nonresidential).
Sources: Baird