RERMAG

Down, but Not Out

Ravaged by Hurricanes Katrina and Rita in 2005 and then smacked with the recession, Louisiana has suffered some serious blows, but rental companies there expect business to pick up in 2010 as more recovery projects get underway.

When Hurricane Katrina swept through the Gulf region of Louisiana four years ago, residents and business owners there had never seen anything quite like the devastation the storm left in its wake. A month later, Hurricane Rita swept through. Then pile onto that the worst economic recession the United States has seen in more than two decades, and still the long wait for the storm and economic recovery continues. After years of planning and waiting on funding however, storm recovery projects are nearing completion and new projects are taking their place, giving the state of Louisiana the distinction of being the only U.S. state showing growth in the area of construction employment. So far in 2009, construction job growth in Louisiana has reached 2.1 percent, totaling 2,800 jobs.

“It shouldn't take an act of nature to put construction workers back on the job,” says Stephen Sandherr, CEO of The Associated General Contractors of America, noting that many of the areas adding jobs, such as Louisiana, were in the midst of rebuilding after a recent natural disaster.

Despite the positive news on the state's construction employment data, rental companies in Louisiana have experienced the effects of the poor economy. Donald Charbonnet, president, owner and co-founder of New Orleans-based Equipco, calls business in 2009 “fair, at best.” The company, which Charbonnet opened right next to the Louisiana Superdome in early 2007 with business partner Shannon Fethke, was launched with the expectation that there would be a lot of big construction work going on in response to the hurricane recovery. While that work in many cases is just getting underway, Equipco has been muddling through, Charbonnet says, waiting for business to pick up.

Henry “Jay” Dinger, rental general manager, for Reserve, La.-based Louisiana Machinery/Louisiana Rents, which has nine rental locations across Louisiana, estimates that business is off between 20 to 25 percent compared with 2008 levels, noting that after experiencing steady growth over the three years prior, 2009 has brought declines in revenues, time utilization and financial utilization.

But despite the rental market's downturn in '09 all the Louisiana rental business operators interviewed for this article expressed genuine optimism for 2010 and beyond. “We feel like it's going to be good and our customers feel like it's going to be good,” says Charbonnet.

To understand the rental market in Louisiana, one has to understand the drivers behind the state's local economy. Tourism historically has been a consistent economic contributor, particularly around New Orleans and the Gulf Coast region. Additionally, a strong industrial market in the southern part of the state, with particular strength in the petrochemical business and off-shore mining and drilling, is a strong contributor. Highway, street and bridge projects, along with rebuilding of levees and other storm-related infrastructure repair and support are also sources of business and revenue for Louisiana rental businesses, particularly in southern Louisiana.

Statewide, residential construction is a significant contributor of business to the rental market and, like most other regions of the U.S., housing starts in Louisiana have declined in '09. Though single-family housing starts in the state are down overall, two of Louisiana's eight metropolitan areas show growth — Baton Rouge, with a 13.3-percent increase in housing starts over the previous year, and Lake Charles with a 12.5-percent increase, according to The Adversity Index, from Moody's Economy.com and msnbc.com, which measures the economic health of 381 metro areas and all 50 states. The state of Louisiana overall is one of only 11 states in the country that has moved from recession into recovery, according to the index, and two of its eight metro areas have moved into recovery — Baton Rouge and New Orleans/Metairie/ Kenner.

According to the index, the states in recovery, including Louisiana, have typically shown less of a swing in the housing cycle and are able to benefit more from strong oil and natural gas prices. That holds partially true for Louisiana, at least in the north part of the state. Mike Crisler, president of Monroe, La.-based Neighborhood Rental, which serves mostly homebuilders and do-it-yourself customers in the Monroe/West Monroe area, says business is up for 2009.

“Our housing market doesn't swing wildly,” explains Crisler. “It doesn't go up like Arizona and Florida do, but it doesn't crash as hard as they do. We think that the housing has been off some since our first year in '06. It seemed like people began to get a little nervous in '07 and then with the [economic] crash, homebuilding slowed way down, so that's been a problem for us.”

According to New Orleans native Charbonnet, the housing market in southern Louisiana will pick up once the coastal areas are better protected with levees, making residents more comfortable, and when insurance rates become more reasonable for homeowners there.

Recent hurricanes Katrina and Rita devastated many homes in the Gulf Coast region and drove homeowners northward, benefitting companies such as Slidell, La.-based Tuff Equipment Rentals, which in spite of the recession has expanded twice this year, first in January when the company opened a new location in Hammond, and again in August when the Kastner family, which owns Tuff, acquired two-location Cole's Rental World. Ralph Kastner Jr., vice president and owner of Tuff, cited the influx of residents to the Slidell area from the Gulf region as a contributing factor in the company's recent growth.

Since the acquisition in August, Tuff Equipment Rentals has consolidated Cole's two locations, moving the Mandeville branch into the Covington store, giving Tuff a third location strategically situated between its original locations in Slidell and Hammond. The company now has three locations with 54 total employees.

Making adjustments

To adjust to the changing market over the past few years, Louisiana rental companies have turned to a number of strategies to stabilize business, meet customer needs, and try to weather the economic storm.

“We have reduced our rental inventory to adjust to present market conditions,” Dinger explains. “We have worked on improving our processes to enable us to maintain efficiency with a reduced support staff. I feel that we have proven to our customers our ability to provide quality equipment and service support to exceed their expectations, which will sustain their loyalty.”

Kastner stresses that all of Tuff's employees are going the extra mile to make rents.

“One strategy that our outside salespersons are doing is attending the actual job bids,” he explains. “This way they can meet with the project managers rather than waiting for the job to start. They also get to know what is going on in certain areas of the state.”

For Charbonnet and Equipco, which is still a young company, having more people in the street trying to promote the company's ability to react to customer needs is a critical strategy. “In our case, because we are one of the few locally owned companies, we promote that we can react faster than other bigger companies that have a segment of management to consult when they have to get decisions.”

Adjusting to a downturn often means having to reduce staff, but the majority of Louisiana rental companies interviewed by RER reported that cutting back staff has either been unnecessary or kept to the very minimum. Instead, rental operators have turned back to the basic tenet of the equipment rental business — service.

“Team work is especially critical in these economically stressed times and it is important to have all departments — sales, parts, service and rentals — working together to attract and retain customer loyalty,” says Dinger. “As rental manager, I have stressed to our sales force the importance of selling the value by encouraging them to focus on our areas of strength, such as customer service and the quality of our rental inventory. Time and time again we have heard from frustrated customers upset with a competitor who provided them with a unit at a much cheaper rate, and experienced downtime because of the breakdown of an aging unit that was not properly maintained. When you see this happening again and again, you feel confident that things are improving and customers realize that a cheap rental rate doesn't always improve the bottom line.”

Stiff competition to win the business of contractors with projects going on has led to a significant decline in rental rates, which has many Louisiana rental business operators concerned. Tuff Equipment's Kastner sums it up in one word — terrible. “Rates are the lowest they have ever been,” says Kastner. “It seems that no matter how low you go someone else is lower. Our goal is to get the rates up to a reasonable number and pass on the ridiculous rates some customers demand.”

Crisler, whose single-branch company competes with five national rental chain stores and three or four independent rental businesses, says that it's very difficult to keep up with the rates the big companies actually charge. Though he says his business hasn't raised rates any in 2009, it hasn't lowered them either.

Louisiana Machinery's Dinger notes that the company's entire service area has experienced sharper rental rate declines on the company's allied equipment fleet and its smaller pieces of Caterpillar equipment such as mini-excavators, backhoes and skid-steer loaders, since like-kinds of these types of units are carried by the national rental companies.

Projects in the pipeline

The slow economy has impacted rental customers as well. Contractors overall are having to face fewer opportunities and thinner margins to compete for the work that is available. “Even though they are experiencing an economic downturn, they feel fortunate that there are more opportunities in our state compared to other areas of the country where the economy has taken a much harder hit,” says Dinger.

Equipco's Charbonnet agrees, noting that many contractors look at business in '08 and '09 as just “good,” but have a lot of optimism about 2010 because there are so many big projects coming up.

Rental business owners across the state are hopeful that their business will pick up once the big construction projects in the pipeline for 2010 get underway. Neighborhood Rental's Crisler mentioned several upcoming construction projects slated for the north part of the state, including a new community college, a new agricultural processing plant and a new car factory dedicated to manufacturing small, fuel-efficient cars.

The number of projects planned for the New Orleans area, the Gulf Coast, and mid- to northern Louisiana is too many to list. According to the U.S. Army Corps of Engineers, as of July 1, 2009, there are 353 total planned contracts designated for the Greater New Orleans Hurricane and Storm Damage Risk Reduction System totaling $10.8 billion. Of those, 192 contracts have been awarded totaling $4 billion and 39 more totaling $3 billion are in construction.

“There are always a few big projects coming up,” Kastner says. “If and when they happen, we will try to get a few pieces of equipment to the contractors. It is always a challenge on the big projects. It seems like every rental company in the world is fighting to get the equipment on these jobs.”

Though Kastner's concern about competition is valid, the sheer amount of work to be done is encouraging for Louisiana rental businesses. One project in the works is the Gulf Intracoastal Waterway - West Closure Complex, which will reduce the risk for storm surge entering the Harvey and Algiers Canals. The $500 million project will consist of floodwalls, foreshore protection, navigable floodgates, a pumping station and an earthen levee.

In St. Charles Parish, two levees are currently under construction with completion expected this fall. Additional construction needed to reach the 100-year level of risk reduction began in late summer. Ten contracts were awarded in 2009 and one additional contract is expected there in 2010.

In the Jefferson and Orleans parishes 34 storm proofing pump station projects have been identified, yet only four have been completed — two in each parish. In addition, the Corps plans to provide a 100-year level flood risk reduction project to New Orleans in 2011.

In Plaquemines Parish, which includes the city of Belle Chasse, flood protection work will continue into 2013. The upcoming project will raise 34 miles of West Bank levees by 9 feet.

The amount of remaining work to be done by the Corps of Engineers is significant enough that Equipco is focusing heavily on the flood protection work to come.

“The Corps of Engineers are concerned about having enough labor to get some of these big levees done,” explains Charbonnet. “It's a very short window because the projects are supposed to be completed in two years. Some are already near completion.” For many states across the U.S., the concern of having more work to complete than laborers to complete it is a dream rather than a reality, a fact that bodes well for Louisiana.

In addition to the flood work, Charbonnet notes that 2010 will also kick off the development of a new medical corridor in downtown New Orleans that will include a new $800 million to $1 billion veteran's administration hospital, a new $1.2 billion LSU teaching hospital called the Medical Center of New Orleans, and a $100 million cancer center, which will be right across the street from the new LSU facility.

“The residual value of the projects that are coming now, which will protect the city better, will lead to more residential and commercial construction in my opinion,” Charbonnet says.

Louisiana Machinery's Dinger notes that a large expansion is planned for a new casino in the Lake Charles area. The Sugarcane Bay casino will be located adjacent to the L'auberge du Lac resort and casino there. Dinger estimates the project will last nearly two years and expects groundbreaking to occur in the first quarter of 2010. In addition, a new casino project has been approved for development in Baton Rouge. Phase one of that project is an estimated $250 million.

“New Orleans has and will be a driver for the state's economy,” says Kastner. “New Orleans is in a rebuilding stage and will continue to be for several years. Compared to the rest of the states, Louisiana isn't doing too badly in the rental industry.”

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