Thoughts From an Investor About Rental Rates
A lot of people have asked me to write about the current rental rate situation, which is, by many accounts, one of the most brutal rate wars in this industry in a long time. This is nothing new or surprising; people have been feeling it developing for a long time. A 60-horsepower backhoe loader, which according to the 2008 RER Rental Equipment Guide should rent for a suggested $2,200 per month, was going for less than $800 a month in south Florida, one source told me. Mason Bailey of Max Equipment in the San Diego area, says rental rates in his area are down anywhere from 20 to 60 percent. Dave Griffith of Modern Equipment on the East Coast says rental rates are down 15 to 30 percent in his company's market areas.
At least 10 people I talked to while working on the RER 100 told me rental rates were more competitive than they can ever remember. The numbers vary from market to market and probably from week to week and job to job. Some people will point the finger at national rental companies, one or two in particular. Others contend the nationals have done a much better job at maintaining tolerable rates than in the last recession. The reality of it is that rate wars occur whenever there are too many machines chasing too few jobs, and no amount of blaming can change the fact that companies need certain levels of utilization, sales people need to get equipment out and contractors that don't have enough work will lower their bids to get scarce jobs and then will have no choice but to pay lower rates.
However much people might say that we as an industry need to do something to control the situation, we all know rate-fixing is illegal anyway and even if it wasn't, there is simply too much competition out there for it to happen.
One major concern that I have, and a couple of you have mentioned the same issue, is the effect this dramatic rate cutting has on potential investors to the industry. Private equity and institutional investors tend to be wary of industries with dramatic rate or price swings. They tend to favor industries they can count on. Obviously the rental market is tied to construction and construction is cyclical and it's not the fault of construction companies or rental companies that the economy is what it is right now.
One potential industry investor asked me why rates fluctuate so much in this industry and after I did my best to explain, he said he understood the laws of supply and demand and understands price fluctuation but then said (and I'm paraphrasing him), “I go to the supermarket and food costs more than it did before; I go to the movies or a ball game and the costs are more or less the same; I go to buy a suit and other than special sales, the prices are higher than a year ago; a car rental or airline ticket is about the same unless I get lucky; but I go to rent a scissorlift, and it's half the price.”
It made him wonder about the integrity, the intelligence, and the level of business sophistication of the people who make decisions in this industry.
I never did hear from this fellow again and don't know if he's still investigating the industry or considering investing in it. But I know he's not alone in his thoughts.