It's that time of year again when I lick my finger and stick it in the air to see which way the wind is blowing and how it might affect the equipment rental industry. Last year I wrote that rentals could be down as much as 20 percent, which I thought was an impossibly low amount. Boy, was I wrong! It looks as if rental revenues for 2009 will come in lower by 30 percent, the average decline reported by the major rental companies for the first nine months of 2009. As of this writing the major companies have not reported their fourth-quarter results, but I don't expect to read about an improvement.
The rental industry is extremely dependent on non-residential construction activity. Through November, activity was down about 8 percent. Most construction analysts expect this rental demand driver to continue down by 11 percent to 12 percent in 2010. A recent Associated General Contractors of America (AGC) survey indicated that the majority of the associations' members believe private non-residential construction will continue down in 2010. AGC members expect 2011 to be the turnaround year for their businesses.
Another rental industry demand driver that I watch closely is construction employment. It makes sense that when more people work on construction there would be more demand for rentals. Unfortunately, construction industry employment has been the hardest hit sector of the economy. Unemployment is approaching the depression-era level of 25 percent. I've plotted construction employment versus our estimate of rental revenues and there is a remarkably close correlation.
Fleet utilization rates have been trending down all year. At the end of the third 2009 calendar quarter, utilization rates deteriorated to an average of nearly 50 percent, which is usually the point at which rental companies shrink their fleets and stretch out their fleet age. Indeed, the rates have gotten to that very low threshold and the major companies are responding as I would expect them to respond by aging their fleets and curtailing fleet expenditures.
The major rental companies have made massive fleet purchasing cuts.
After taking all of this into account I believe that total equipment rentals will decline for a third year in a row. My estimate for 2010 versus 2009 is a decline of around 15 percent after the steep 2008 to 2009 decline of 30 percent and the 2007 to 2008 decline of 4 percent. If I'm right about the 2010 forecast the industry will be back to the same dollar volume level as 1998. The fallout of declines for three years in a row will be felt for some time to come. I have not tried to predict how many fewer rental companies there will be at the end of this period. It's likely we will see a rather large consolidation of rental companies especially among the small mom and pop operations that don't have access to finance sources and public markets as do the publicly traded companies.
Frank Manfredi is president of Mandelein, Ill.-based Manfredi & Associates, a marketing information firm that specializes in the construction, mining, farm and material-handling equipment industries. Visit www.machineryoutlook.com.
