Construction Equipment Rental
Date August 2018
By the numbers
- Forced Liquidation Values of construction equipment have dropped 8% over last year
- Volumes of equipment sold on the resale market have increased 55% over last year
- Values on the whole remain steady, resulting in slight percentage variations and a more stable market
Global projects drive current growth: Heavy construction equipment is the backbone of the construction industry. Depending on the equipment type, pieces may serve singular or multiple purposes. Heavy equipment serves functions including earthmoving, finishing and material handling, and material transport. Global heavy construction equipment industry growth is directly connected to worldwide infrastructural development and related activities. In addition, large global construction projects have helped bolster growth for construction equipment sales, as well as rental market growth.
The addition of new technologies to equipment has been an ongoing trend within the market, and adoption rates have been increasing over time as more and more manufacturers add new technologies to existing equipment. The high cost of heavy construction equipment is one of the major factors supporting retrofitted equipment, as well as new equipment with the supporting technologies. The market has also seen increasing demand for mining grade heavy construction equipment. The major players within the heavy equipment market include Caterpillar, Hitachi, Terex, Komatsu Ltd., CNH, John Deere, Oshkosh Corp., and Kobelco.
The trend of companies transitioning to digital services that can provide automated service enhancements, mapping features, and equipment service tracking for more efficient operation and operator time usage continues. Solutions including computer-aided earthmoving, grading programs, and maintenance solutions enhance operator efficiencies on jobsites. Factors such as these have helped to contribute to reported growth and increased demand from worldwide players like Hitachi Construction Machinery, which reported a growth rate of 450 percent in net profit for fiscal 2017.
Continued growth for rental equipment: In its latest five-year forecast, the American Rental Association expects the U.S. equipment rental industry to continue to grow consistently over the next five years, resulting in total revenue of $60 billion by 2021. Total revenue for 2018 is forecasted to reach $51.5 billion, with increases of 5.6 percent, 5.0 percent, and 4.5 percent forecasted for 2019, 2020, and 2021, respectively. Slight upticks have been recorded in expected revenue growth rates for 2019 through 2021 since the beginning of 2018 as positive results continue to point towards a brighter outlook.
Purchasing construction equipment often requires significant down payments, diverting large portions of capital from operating expenses. Additional expenses include insurance, taxes, licensing, interest on loans, and storage costs. Equipment owners are also responsible for transport from job site to job site, whereas rental companies can get equipment to new work sites quickly and efficiently, using computerized maintenance programs and GPS systems to keep tabs on location, status, and service needs. Rental houses also upgrade their inventories on a regular basis, offering access to the newest and most advanced equipment. This makes it easier for customers to comply with changing EPA emissions standards, including Tier 4, which is the strictest requirement for off-highway diesel engines. If something goes wrong, rental companies have the tools and expertise to make it right. Mechanics are dispatched promptly to fix malfunctioning equipment on site or replacements are sent. Renting equipment can enable younger companies to better compete for larger contracts as well.
Oil and gas recovery improving values for some equipment: A booming oil and gas industry drove significant demand for construction equipment rentals post-recession. When oil prices dove in late 2014 utilization for rental fleets serving the fields were hammered, causing a portfolio exposure for lenders. In 2016, rig counts remained near record lows before beginning the road to recovery, adding a surer degree of stability than what had been seen for some time. As world markets worked through stretches of volatility and uncertainty, the supply and demand of oil started to become more balanced worldwide. Although the world supply of crude has yet to completely rebalance with current demand, the increase in crude prices from the lows in 2016 have spurred U.S. companies to engage in projects without the fear experienced during the worst of the downturn. While oil prices remain a top issue for many banks, most rental houses have adapted. Some companies have worked to broaden the exposure to new markets, and some have rededicated efforts towards pricing competitively. Most rental equipment used in oil and gas fields is not job-dedicated and can be redeployed to other sectors. For example, home builders and municipal construction contractors have driven demand for equipment such as wheel loaders, loader backhoes, and track loaders. Although further recovery for the energy sector is predicted long-term, the relationship here must be viewed with cautious optimism. Look to appraisers evaluating rental equipment to consider the versatility of equipment and its impact on marketability and value.
Values down overall but volume up: EquipmentWatch, a resource that tracks critical heavy equipment benchmarks, reported that the general price index for construction industries fell slightly in June 2018 from the previous month; however, volumes increased year-over-year. This was in line with forecasts resulting from seasonal drops for the start of summer. Fair Market Values of the most widely utilized pieces of equipment were mixed as follows:
- 4-Wheel Drive Articulated Wheel Loaders: -3.8%
- Compact Track Loaders: +8.9%
- Standard Crawler Dozers: +0.7%
- Crawler Mounted Excavators: +4.9%
- Electric Scissor Lifts: +6.1%
- Telescopic Boom Rough Terrain Lift Trucks: +6.2%
Year-over-year, Fair Market Values and Forced Liquidation Values dropped by 6.5 percent and 8 percent, respectively, in June 2018; however, auction volume was up 18.9 percent. EquipmentWatch expects value spreads for equipment to narrow and remain somewhat steady through the end of 2018.