Rental Revenue Jumps 10% Percent in Q3 While Equipment Prices Rise 6.3%: Baird/RER Equipment Rental Survey

Oct. 26, 2021
Equipment rental activity in the third quarter of 2021 was 10 percent higher than the third quarter of 2020, according to respondents to the quarterly Baird/RER equipment rental survey.

Equipment rental activity in the third quarter of 2021 was 10 percent higher than the third quarter of 2020, according to respondents to the quarterly Baird/RER equipment rental survey. 49 percent of respondents saw revenue and utilization above their initial budget, while only four percent were below. Rental rates increased 2.7 percent year over year, and utilization increased 500 basis points sequentially.

However, there were multiple headwinds impacting demand growth including labor shortages – a challenging issue for rental companies as well as their customers – and elongated lead times for new equipment. However, despite these headwinds, the initial 2022 outlook calls for another year of high-single-digit growth.

The majority of respondents experienced improving end-market demand with activity returning to relative normality, with some of the potential rental demand unfulfilled because of the labor shortages, supply chain disruptions and lengthened lead times.

Average rental revenue increased 10.2 year over year, slightly above last quarter’s 8.9 percent year-over-year growth.

“The market is the strongest I have seen in my 18 years,” said one respondent. “Rates continue to increase, and we look forward to continuing market share growth. Focusing on niche markets and expanding our product offering has been a huge boost to outgrowth.”

“We are seeing an uptick in the energy sectors, especially petroleum,” said another. “Homebuilding is strong, so our infrastructure and site development contractors are seeing an increase in jobs and perspective needs.”

“Concerned about slowdown given inflation and supply/labor shortages,” added another respondent.

The Covid spike, caused by the delta variant, was a modest headwind for about 35 percent of respondents, while clean-up from weather events during the quarter was modest tailwind benefiting about 35 percent of respondents.

Growth in the cost of new units increased 6.3 percent, the highest growth in that area since the first quarter of 2013. OEMs appear to be aggressively increasing equipment pricing to offset the cost of inflation, including record high steel prices.

“The cost of equipment is going up exponentially 10 to 17 percent between this year and last,” said a respondent. “We will have to raise rates as we can’t absorb this much of an increase.”

“We are raising wages, rental rates and labor rates to offset the increased costs associated with acquiring new equipment, repairing equipment and retaining,” said another. However, a third respondent said utilization is high, but the rates are not moving at the pace of the increase in cost of equipment.

These factors benefited fleet utilization, which was 66.2 percent compared to 61.3 percent in the second quarter and up from 63.6 percent in the third quarter of 2020. The utilization rate for access equipment jumped from 60.7 percent in 3Q20 to 69.5 percent. The utilization rate for earthmoving equipment declined, however, from 68 percent in the third quarter of 2020 to 66.2 percent. Small iron utilization jumped 900 basis points from 52.2 percent to 61 percent, year over year.

Despite the cost of new equipment, the average fleet size (in units) increased 2.8 percent year over year in 3Q21. Respondents expect fleet purchases to be up 9.1 percent year over year for the next six months.

“Revenue and fleet size will be impacted by how much new equipment we can actually obtain from manufacturers,” said one respondent. “Fleet is down by unit count by 15 to 20 percent. It is going to take some time to rebuild fleet size.”

Respondents expect a 10.1-percent revenue hike in the fourth quarter of 2021, with 43 percent of respondents expecting a 5 to 10 percent revenue increase in the fourth quarter, and 24 percent expecting a 10 to 15 percent leap.

For 2022, average rental revenue expectations are for a 6.5 percent increase, slightly below the 8 percent increase expected for 2021 from the prior survey.

“The lack of an effective workforce is taking its toll on everyone,” said a respondent. “Our business, our customers, our suppliers, everyone is in the same boat. It makes day-to-day operations very frustrating. We are still able to get things done and are very appreciative of the employees we have retained throughout these trying times.”