Rental Relief?

By all accounts, the “Great Recession” ended in 2009. However, that doesn’t mean happy days are here again — at least not yet. The forecast for the equipment rental industry, and for construction in general, calls for continued revenue declines in 2010, but not as severe as in 2009.

“This will be a difficult year compared to 2009, but less difficult than 2009 compared to 2008,” says Daniel Kaplan, an industry consultant based in Morristown, N.J., and the former head of Hertz Equipment Rental Corp. (HERC). “There is more fleet available than there is business. That means time utilization at rental companies is lower than it needs to be to bring things out and relieve the pressure on rates.”

However, Kaplan says that he expects “well-managed rental companies that have taken cost actions to have a better year in 2010 than 2009.” He also says the forecast doesn’t necessarily apply to independents because of their size. “They know how to compete and can be somewhat optimistic,” he says.

According to the latest research compiled by the economic forecasting firm IHS Global Insight for the American Rental Association (ARA) and Rental Management magazine, North American rental revenue dropped to $33 billion in 2009, a substantial decline from the market’s peak in 2007. Prior to the end of the year, IHS Global Insight said research indicated that the U.S. equipment rental market totaled $30.3 billion in 2009 while the Canadian equipment rental revenues exceeded $2.6 billion. Both totals are contractions compared to 2008, with rental revenue in the construction and industrial equipment and general tool segments taking a bigger hit than party and event.

However, compared to the construction marketplace, IHS Global Insight said the equipment rental industry fared well. The company said total U.S. construction spending fell more than 12 percent in 2009 and is expected to fall more than another 5 percent in 2010 before rebounding in 2011 and 2012.

“The mixed outlook for construction — weak nonresidential construction, but strengthening residential construction — mirrors the mixed outlook for the broader economy,” IHS Global Insight said in its Fourth Quarter U.S. Construction Briefing.

In the near term, the conditions for the equipment rental industry are not expected to improve. IHS Global Insight projects North American rental revenue to decline further in 2010 before showing some growth in 2011. However, looking at the longer term forecast, there are reasons for optimism. By 2014, IHS Global Insight forecasts North American rental revenue to be $41.5 billion with the U.S. market accounting for nearly $38.2 billion, well above revenue peaks reached before the latest recession.

Kaplan also sees 2011 as a potentially good year for both the equipment rental industry and for equipment suppliers. “Manufacturers will face another difficult year in 2010 because of diminished capital expenditures. It will come back, but 2010 will be tough. I see 2011 as a turnaround year. There will be more capital expenditure spending because of fleet age.”

The outlook for the rental industry, according to IHS Global Insight, is driven by economic fundamentals. The construction market in the United States has witnessed the most severe recession in recent history. While residential construction started to show signs of a rebound in 2009, the downturn in nonresidential activity has just begun and the sector is not expected to recover until 2011. As a consequence, IHS Global Insight said growth in U.S. rental revenue in the construction and industrial equipment and general tool segments is not expected to cross into positive territory until 2011.

Wayne Walley is the editor of Rental Management, the premier publication for the American Rental Association. He is based in Moline, Ill.