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California's Steps to Recovery

Aug. 15, 2013
The U.S.’ biggest economy is making steps towards recovery and rental companies in some pockets are enjoying the ride.
A service truck at PDQ Rentals in Southern California is ready to head out to a jobsite. (Photo by Michael Roth, rer)

It’s the biggest state, also known as the Golden State. California is a state of opposites, polarities and contradictions. It is seen by many as too liberal, yet the presidents it has given the world are Ronald Reagan and Richard Nixon.California’s economy is the 12th largest in the world, if U.S. states were ranked with countries. As of 2010, the gross state product is about $1.9 trillion, 13 percent of the United States’ GDP.

California’s population is 37.9 million people and — always — counting. It tends to be where a lot of things happen first and often is seen as somewhat of a bellwether for the U.S. economy. The highs tend to be higher, the lows tend to be lower, and people around the country often look to California for trends. In the recent recession, California’s fall was one of the most dramatic in the country, and as such, many look to chart its recovery for evidence of their own futures.

But California is many states in one. It has mountain peaks as high as Mount Whitney at 14,500 feet, and the lowest altitude in the United States, Death Valley. It has liberal, progressive cities, and conservative agricultural areas, with an agriculture industry valued at more than $40 billion per year. There are vast forests in the north, deserts in the east and south, mountains topped only by the Rockies, and a coastline that extends for 840 miles north to south.

Gov. Jerry Brown, generally viewed by the business community as too liberal, has proven to be an astute fiscal conservative, taking the state from a $20-billion-plus deficit to apparently balancing the books. Unemployment was 8.5 percent as of June 30, after touching 12.5 percent in late 2010, according to the Bureau of Labor Statistics. California’s 3-percent growth rate in the second quarter of 2013 was the highest in the nation, according to UCLA’s Anderson Forecast, but in many areas of the state, people will tell you that that growth rate hasn’t gotten around to their neck of the woods.

Mitch Gutierrez of Orbit Rentals, Whittier, Calif., whose business has improved in the past year or so, shows a pipe wrench to a customer. (Photo by Michael Roth, rer)

Economically, the state is as diverse as its topography, and the reaction to the recovery is varied as well. There are what John Wetherholt of Fagan High Reach in Newark, Calif., calls “islands of prosperity,” where business is booming, in San Francisco, San Jose and the computer software-heavy technology regions south and east of San Francisco known popularly as Silicon Valley. The economy is certainly improving in other urban centers such as sprawling Los Angeles, and San Diego at the southern tip.

However, in more rural regions and small towns, business isn’t quite as strong. Alex DuBose of Guy Rents in Chico, 90 miles north of Sacramento, says business is slow, only marginally stronger than during the recession. The agricultural Central Valley is improving slowly. The Inland Empire cities of Riverside and San Bernardino, dramatically stung by the housing collapse a few years ago, are taking tentative steps toward recovery.

Many rental company owners in the state would echo DuBose, who said: “To build something, the permits cost so much. People tell me that just the permits for a building they want to build cost $20 a square foot, so why would you want to build anything? Between the government regulations, we spend too many resources trying to comply with bureaucracy.” While DuBose said his company last year grew by a modest 2 percent, and he sees almost no construction going on in his region.

The major metropolitan areas have been the first to see improvements, especially the San Francisco Bay area. As for the California economy overall, it’s better, but don’t uncork the champagne bottles yet. It remains very expensive to do business in the state and if the EPA’s Tier 4 regulations aren’t enough, add the California Air Resources Board regulations on top of them.

RER talked to rental people throughout the state and found their views varied, but an overall tone prevails of far greater optimism and improved revenue than in previous years.

John Wetherholt of Fagan High Reach, Newark, Calif., considered closing down his business until the Bay Area started a strong turnaround last year. (Photo provided by Fagan High Reach)

To a large degree, current economic conditions are governed by location, with strong pockets emerging in particular areas.

“Our area, the Silicon Valley, is coming back rapidly because of renewed growth in the computer industry, plus we have the 49ers stadium going up, so we’re in a little pocket that’s doing very well at this point,” said Rob Pedersen, CEO of Campbell, Calif.-based A Tool Shed. “We’re up 18 percent over last year and last year was good, so it’s continued growth. But I talk to some people in Southern California and it depends where you’re at. Some little pockets are doing well; others are just holding their own, not in growth at all.”

 Wetherholt, owner of Fagan High Reach & Equipment in Newark, Calif., in the San Francisco Bay area, refers to “prosperity islands” that are doing extremely well, surrounded by areas that continue to be mired in economic slumps.

“Things have changed dramatically, things getting into a normal peak-and-valley curve, a construction curve,” says Wetherholt, whose rental business is essentially in the middle of the Silicon Valley. “It started to change about April of last year, although the 35 or 40 months before were just flat line. Around September of 2011, I was seriously thinking of closing this place down. I told my wife, ‘if things don’t pick up come June (of 2012), we’re going to pull the plug.’ ”

Wetherholt has the good fortune of being in the right location to take advantage of improving conditions. “I’m right in the middle of the Bay Area,” he says. “I live in Fremont, Calif., the business is in Newark, right square in the middle of Silicon Valley. I consider the Silicon Valley, Santa Clara County, San Mateo County, San Francisco County, parts of Alameda County, to be a prosperity island. You get off the edge of ‘Prosperity Island,’ you go out into the valley, out to Stockton, and it’s third world. They have not yet recovered out there.”

Like many California independent rental companies, Fagan mostly rents to smaller contractors and subcontractors, and remodels and tenant-improvement work are his bread and butter. “My customers are mostly subs working with general contractors doing a lot of remodeling of existing buildings.” 

Many of the industrial parks in the Bay Area are already built and have been foreclosed upon during the recession. “Then things collapsed, banks took back the buildings and auctioned them off, and people with money bought property around here cheaply,” Wetherholt says. “Now they are able to go in and remodel them so it’s a leveler in terms of bringing the commercial real estate pricing down so people can get back into them.”

Google’s headquarters is nearby and Facebook is less than three miles from Fagan. Apple is also not far away and all three companies are undergoing massive construction overhauls.

“I’ve got one customer working at an industrial park adjacent to the Facebook campus and that park is on fire right now, I’ve probably got 10 machines right now in that park,” Wetherholt says. “They are existing buildings being remodeled, not new construction. They go in there and gut them all the way down to the walls, take all the stuff out and then remodel to the specifications of the new tenants. They are all modern inside.”

Housing has yet to take off in the area and probably won’t for another couple of years, partly because of the state permitting bureaucracy, Wetherholt says.

“That’s driving the cost of existing homes up,” he notes. “Another thing going on around here is high-density housing, which I call ‘stack-and-packs,’ which is a planned community with condos and townhouses with 14-foot ceilings. There’s one right next to the 49ers stadium, it’s currently an industrial park. They’re going to tear the industrial park down and put in about 1,000 homes and townhouses, with retail and restaurants on the lower floors. I wouldn’t be surprised if, within a few years, a 1,200-square-foot condominium will cost a couple of million bucks. They’ll be beautiful places, but it will be very, very expensive to live in the Bay Area. I think we’ve got a five- or six-year run here, but I don’t know what’s going to happen after that.”

Chris Smith, CEO of Livermore, Calif.-based Cresco Equipment Rentals, agrees with Wetherholt’s analysis. “There is some very dramatic activity in San Francisco and the peninsula and Silicon Valley, that has increased enough to really make the entire Bay Area buoyant and active,” Smith says. “But if you drive 50 miles in any direction from that epicenter, you’re right in the heart of a continuing housing and employment depression that hasn’t felt the ripple yet.”

Smith says his contractor customers are more optimistic now, even those from the outlying areas. “Everybody is a little more optimistic because they may have the opportunity to come down and bid on the work where it’s happening so we see a lot of people from out of the area in the San Francisco Bay area bidding work. They come from Fresno, the Valley, Tracy, Stockton and Modesto. So they feel more buoyant but not necessarily about where their home base is.”

Smith adds that the region has substantial private sector work for the first time in years. “There’s enough work on certain projects in Silicon Valley that if it all happens at the same time, I don’t think there’d be enough contractors in the area to do it. If the Apple project hits full force, it would be a driving force in changing the contractor market.”

Ninety miles east of the Bay Area, Sacramento is improving, albeit more slowly.

“The real estate market has finally leveled off, so that has helped the average homeowner person to go, ‘Ok, I’m going to stay in my house, this is what it’s going to be, I want to remodel,’ ” says Dale Blackwell of Sacramento’s Aba Daba Rents.

Sunstate Equipment, based in Phoenix but strong in California, works at a jobsite. The company widened its customer base during the recession, helping it to be a strong position for the recovery as more private capital returns to the market. (Photo provided by Sunstate Equipment)

The Central Valley of California is one of the world’s most fertile and productive agricultural areas, with “agribusiness” being a $40-billion-plus annual industry. However the region did not fare well during the recent recession and is not returning to form completely.

“It’s varied in our area,” says Glenn Phares, CEO of Bakersfield-based BSE Rents. “If you’re in oil and gas, you’re fine. Things are moving along well there, but we’re not seeing much on the nonresidential construction end at all. Housing has recovered in Bakersfield fairly well, but it hasn’t been enough to drive homeowners [to rent], which, being a smaller business, is a significant part of our niche. If you’re not in the oil, gas and energy game, it’s still pretty tough. There are some local independent guys that specialize in the energy sector and they’re doing pretty well.”

The oil business is one of the reasons Kern County, one of the largest areas in the Central Valley, has been able to weather the recession. As far as rentals go, mostly larger companies serving the oil and gas segment need a larger fleet of aerial work platforms, earthmoving and power generation equipment, but BSE is able to pick up some of the pieces with mid-sized tractors, pressure washers, light towers and other machines. BSE had a good spike with wind energy for a couple of years as well.

The city of Stockton had the worst foreclosure rate in the nation for a period, and Fresno and Modesto were hit hard as well, although the market is rebounding. “We’ve had a good run in housing the last 12 months, it’s started to come around,” says Phares.

Still, Phares, whose BSE has five California locations and one in Arizona, expects relatively flat business in the Central Valley for the next couple of years. Phares is hesitant to grow the company beyond 50 employees because of health-care legislation.

“There’s a lot of uncertainty because of the health-care issue,” he says. “I know it sounds counter-productive not to grow the business, but the way the health-care law is set up, it’s taken a toll on my decision-making. We need to do more with less. It’s rigorous in California with the air-quality management district breathing down our necks. We’ve got to sell off all of our trucks and old fleet and re-fleet with new equipment. For the big guys, it’s easier. They can just move the old stuff out of California and re-utilize it anywhere they want. For the little guys who don’t have locations outside of California, it’s a real bear. You have to get rid of it and that’s very tough. Working through this is a typical California challenge.”

Dale Blackwell, owner of Sacramento's Aba Daba Rentals and executive director of the California Rental Association, says remodeling jobs are helping the economy recover in the state's capital. (Photo by Vicki Blackwell, Aba Daba Rentals)

Los Angeles was hit hard during the recession. John Perry, southern California regional sales manager for Sunstate Equipment, said the Phoenix-based company had to adjust its sales and marketing strategies to go after publicly funded jobs to get by the past few years. Now Sunstate is seeing private money coming back, even in the Inland Empire, which was savagely hit during the recession.

“You also see residential coming back, and while residential is not equipment intensive, so by itself is not a driver for us, it encourages all the infrastructure work that has to be done along with it,” says Perry. “The mini-malls, and the strip centers, the Jack-in-the-Box that gets built because there are homes to service, that kind of stuff. I read an article that South Orange County residential housing is coming back and that’s encouraging. It feels like the ship is righting itself; like the trend is in the right direction.”

Public works, and road and highway construction work has helped Sunstate in Southern California and by developing relationships with builders it didn’t have seven or eight years ago, the company is better prepared for additional post-recessionary activity as it increases.

Dennis Turner, CEO of PDQ Rentals in Santa Fe Springs, Calif., east of Los Angeles, which endured 40-percent revenue declines during the recession — normal in Southern California — says most construction customers seem to be more confident as activity increases. Turner finds rental rates still strongly competitive in Southern California, a sentiment expressed by most California rental people.

“I’ve told my salesmen for years that it takes 30 seconds to cut a price and three years to get it back,” says Perry. “I think this one may be more than three years. It’s very difficult; it has forced us to become more efficient in the way we do business. But it’s difficult to make money and until we can get rates back to where they belong, it will be a struggle. It’s difficult to go to a customer who isn’t making money on his project and tell him you need more for your equipment.”

Nonetheless customers are far busier. “They’re steady,” says Mitch Gutierrez, whose Whittier-based Orbit Rentals is just a couple of miles from PDQ. “Some are saying that they’re swamped. Homeowners are renting more equipment on the weekends. They’re starting to remodel. It’s not what it used to be but they are doing remodels. Once in a while they do get funding for it, which is the tough part. Nowadays you have to be squeaky clean.”

Orbit’s main rental fare is painting, gardening and plumbing equipment, trailers, scissorlifts and general maintenance equipment. His customers tend to be tradesmen who pick up equipment in their trucks, and they’re driving them a lot more on jobs these days.

Farther south

Moving farther south out to the desert near Palm Springs and south toward San Diego, Rick Windbigler of Fallbrook Equipment Rentals, in Fallbrook and Yucca Valley, Calif., says his region is recovering nicely.

“It’s a slow recovery process, not at all what we had hoped for but we’ll take what we can get,” he says. “We’re starting to buy equipment again, adding to the fleet, so we’re going in the right direction. We do a lot with smaller contractors, and some large ones. We’ve gone from waiting for the phone to ring and looking for jobs to everybody working and bidding jobs. We do have a bit of a backlog again, a bit like the old times.”

Windbigler says the uptick is “across the board,” touching on all facets of his rental business. “We’re seeing it in the small contractors that do a lot of residential stuff,” he says. “We’ve got a big grove and nursery-based area here, and those guys are picking it up. Homeowners are spending money again on their backyards and houses are changing ownership. Everybody that has to deal with housing is coming back. Housing is a slower climb than everything else that we deal with but it is getting better.”

Windbigler said the desert areas, Morongo Valley and Yucca Valley, were the most affected during the recession from housing. “It was investor-driven out there more than anything and when it hit, it hit harder out there. We were seeing some very large tracts being built and now we’re getting back to the small developer doing one or two houses at a time.”

Commercial is picking up in the area as well.

Like most California rental people, Windbigler says the EPA and CARB regulations are a difficult challenge but have a side benefit of stimulating contractors to rent.

“I don’t ever remember buying backhoes for $100,000, and we’re doing that now,” he says. “But on the other hand, the contractors out there are looking at the same backhoe for $100,000 and they’re not feeling that great with the economy that they’re willing to buy equipment so it is helping out in the rental end of things. They require more from us because they sold off their old machines and they are not willing to replace them yet, or don’t have the security yet in their jobs to replace themselves yet. A lot of jobs on the military bases are now requiring certain tiers to even be on the jobsite. I can’t send a Tier 1 machine to the base; it has to be Tier 4 or Tier 4 interim.”

Going to the extreme south, San Diego is also bouncing back and rental company owners have seen pickups on the construction and homeowner side of the rental business. Brad Thomas, owner of BJ’s Rentals, has seen a positive uptick in business, but also is concerned about the burden of what seems to be ever-increasing regulations.

“We’re trying to get through new truck regulations as well as CARB,” says Thomas. “On the local side, we have had problems getting permits on an above-ground fuel tank, still not approved after five months. We are trying to get a permit for retail propane sales; it is going to cost us $10,000 to get the permits and time to obtain them. Then there is ObamaCare. It is just taking more of our time to address these issues and it takes away from running the day-to-day operations.”

Danny Elias, trainer at PDQ Rentals, takes care of business at the rental counter. (Photo by Michael Roth, rer)

While there are indeed significant differences in California’s multiple regions — not all of which were touched on in this article — the overall trend looks solid for the next few years. Economist Jerry Nickelsburg notes in the UCLA Anderson Forecast that California is outpacing the national economy in measured growth, has a growth in employment rate exceeded only by Utah in the 12 months leading up to April 2013, and has expected total employment growth of 2.6 percent, with higher than 2 percent expected in 2014 and 2015. While it’s not a boom like many would want and expect, for the most part, the trend is upward in California. rer