Rental revenue jumped 7.9 percent year over year in the third quarter of 2023, according to respondents to the quarterly Baird/RER rental equipment industry survey. The rental market dynamics remain relatively healthy but with slowing growth. In the second quarter, the year-over-year boost was 10.8 percent. Expectations are for 6.8-percent growth in the fourth quarter of 2023 and 8.6 percent growth for the whole year, down from 10.2 percent in the prior survey. Current growth rates remain solid while commentary was mixed, with plenty of cautious commentary regarding demand trends and the operating environment for the fourth quarter and beyond.
Fifty percent of respondents reported that the third quarter was in line with their expectations, with 28 percent enjoying better-than-expected results (14 percent reported much better) and 21 percent reporting worse-than-expected results. Baird’s analysis is that demand is still healthy for now but many respondents are starting to see demand moderation along with increased equipment supply. The positives are that the backlog of work extends through 2024 and that nonresidential verticals outside of “Office” construction have remained strong with visibility into 2024.
On the negative side, however, project delays are becoming more common, with some commercial projects having start dates put on hold or suspended indefinitely. Interest rates and materials cost issues continue to hamper larger projects, and that competition remains just as intense but for fewer projects. Overall levels of activity remains solid, but amid concern about interest rates impacting demand going forward.
Respondents expect a 6.8 percent revenue increase in 4Q23. For perspective, expectations for 3Q23 were 5.6 percent, but actual growth was 7.9 percent. A handful of respondents expect revenue declines and a growing number expect flat revenue.
“The majority of our customers are booked through most of 2024,” said one respondent. “We anticipate work to remain strong through 2024,”; “Markets are remaining resilient with the exception of Office buildings,”; and “All larger rental equipment is very hot,” were all positive comments from respondents.
However, some were less optimistic. “Demand is very quickly falling as inventory levels are filled up,” said one. “Returning to normal business cycle but declining demand in year-over-year terms.”
“Competition remains intense for what seems to be less overall business. Rates and utility are accordingly under pressure,” said another. “Several proposed large projects are being delayed or reconsidered,” said another. “Interest rates, cost of materials and government issues are all significantly impacting progress.”
Fleet utilization was 61.8 percent, down significantly from the survey record high utilization of 67.9 percent in the third quarter of 22. The utilization rate for Access Equipment, which is 35 percent of survey revenue, dropped to 63.8 percent from 67 percent a year ago. Utilization for earthmoving equipment, which is 34 percent of survey revenue, decreased to 61.8 percent compared to 67 percent in 3Q22. And small iron utilization, while only 20 percent of survey revenue, plunged to 57.8 percent compared to 68.9 percent in the year-ago quarter.
Rental rates growth appears to be peaking, although third quarter rental rates did increase 2.2 percent, which was relatively in line with the second quarter year-over-year hike of 2.3 percent. However, the previous seven quarters had increases in the 3.7 percent to 4.8 percent range. Forward rate growth expectations are lower as well, with rental rates expected to increase 2.9 percent for the full year compared to 3.1 percent, which was the expectation prior to 2023.
However, the slowdown in rental rates appears to be more a function of increased equipment supply more than demand erosion with project backlogs largely healthy despite increasing commentary on delays, according to Baird. Competition has also increased with smaller rental companies reverting to the pre-Covid theme of highlighting aggressive pricing by national rental companies.
“With a flood of equipment into the markets for rental houses, we are seeing surplus available coupled with a slight regression in demand,” said a respondent. “Rates will regress to acclimate as customers will have options and rental houses seek to keep assets productive.”
Another dynamic having a potential impact on rental companies is higher interest rates combined with a residential construction slowdown with a possible effect on the availability of loans from regional banks. Since the second quarter of 2022, Baird has asked how a housing slowdown and higher interest rates would impact rental companies’ capex decisions. Feedback on residential markets has generally been consistent, with 30 to 40 percent of respondents expecting a modest impact. The impact from higher rates is where most of the change occurred, with about 70 percent of companies now expecting some negative impact versus about 35 percent a year ago. Also there is less of an equipment shortage now, as lead times are normalizing. Fifty-four percent of respondents say higher financing rates will modestly impact capex decisions, and 21 percent say higher financing rates will meaningfully impact capex decisions.
Still, overall, the majority of the respondents said they are having a good 2023, with larger players experiencing a better year on average. Fifty-nine percent of respondents (revenue weighted) rated 2023 as an “excellent year”, while 22 percent of respondents (equal weighted) said the same.