Which Way in '03?

Dec. 1, 2002
There is no denying it has been a tough couple of years in the equipment rental business. Demand is way behind supply in most areas. Rates, relative to

There is no denying it has been a tough couple of years in the equipment rental business. Demand is way behind supply in most areas. Rates, relative to equipment expense and overall cost of doing business, are viewed by many as being at an all-time low. The economy is at best sluggish in many regions and a lot of projects are on hold because of overall uncertainty and fears over terrorism and war.

A dire forecast? Not really, according to most rental company owners. Many remind us that we still live in a very dynamic economic environment where what we see as a slowdown is enviably robust to many societies. While few rental people expect a year of vibrant growth, and most anticipate an economy that will continue to limp along, most expect at least a slight improvement.

While the early part of this decade has been tough, most rental executives believe that if they've made it this far, the light at the end of the tunnel will soon be visible and that the bridge to better times is already being built.

Fire and Drought

Drought didn't only refer to lack of rain in the western states. But many expect at least a slight improvement in 2003.

By Michael Roth, RER

To many in the western United States, 2002 will be remembered as a year of drought. Arizona, Colorado, Nevada and Utah suffered record dryness and the rest of the mountain region and Far West wasn't much wetter. Fires raged in mountains and canyons throughout the West, some of massive proportions.

Although weather conditions were not the only cause of a sputtering economy in the west, where non-residential construction or the lack thereof is generally viewed as the primary culprit, the weather in many cases had a direct effect.

“We are in a severe drought-stricken area, so no gardens were put in or landscaping done,” says David Lee Lamke, of Rent-All Rentals, Cortez, Colo. “We have gotten moisture already this fall and it looks good for more this winter. If we get enough snow this winter, 2003 should look good.”

The devastating fires affected business as well. For example in the Durango, Colo., area, Jim Duke of Target Rental reports that various construction projects in the area were put on hold after the Missionary Ridge fires because insurance companies stopped writing construction policies. Although some commercial growth is projected for the area, highway funding is still on hold.

In the Northwest, Boeing laid off thousands of workers. In Washington, Oregon, and California's Silicon Valley, the technology industry continued its grinding slowdown. Larry Pedersen of Campbell, Calif.-based A Tool Shed could see the results in his daily commute.

“In 1998 and 1999, it took me an hour and 15 minutes to drive to work and I hated it,” he said. “Now it takes me 15 minutes and I love it. But I'd rather have the hour and 15 minute commute any time.” Pedersen tolerated the congested roadways he so detests because it meant his eight-location rental company, based near San Jose, was doing robust business. But now the freeway traffic is flowing smoothly as companies lay off workers and prospects for the region appear gloomy, at least in the short term.

Rental people in the San Francisco Bay Area also see short-term prospects that wouldn't be described as the gate to gold. “Twenty months ago I didn't have enough equipment and now I have a yard full,” says John Wetherholt of Fagan Hi-Reach, Newark, Calif. “I can't blame it on competition because my competitors also have yards full of equipment. In my opinion, the tech collapse is total, we have hundreds of industrial parks with brand new buildings, many of which were built and never occupied. I have not seen so many lease signs since the early '90s.”

There were strong pockets through the region. Chuck Johnisee of Your Rental & Party Center in Hood River, Ore., said his company enjoyed a 20 percent increase in 2002 and expects a jump of at least 5 percent in 2003.

With tough business conditions, most rental companies are understandably cautious about their expenditures. While some rental companies forecast increased expenditures on fleet, some, such as Aurora, Colo.-based EEC Rentals, will reduce, with that company planning a 25 percent reduction in fleet size in anticipation of a down market in 2003. “We are buying only those things we feel we have to and we are trying to keep the equipment longer than normal,” said Brad Bengson of Brown Rental in Boise, Idaho.

Bengson also expressed a concern many rental companies share — the fear of unmanageable debt. “I am not borrowing money for the first time in over 20 years.”

Rental companies in the Pacific Northwest and the northern mountain region of Idaho and Montana also have been through some tough times. Bengson, for example, said commercial construction, which accounts for about 35 percent of his company's volume, is down about 40 percent from last year in the Boise market. Brown Rentals, however, has held its own and even picked up market share because of its strength in the general rental and party segments. However, other, more construction-focused companies in the area have been hurt considerably by the non-residential slump.

Mike Watts, whose Sunstate Equipment fans out throughout the western United States, says his company experienced decreased revenues in 2002, but expects a mild upswing in 2003. “Some customers appear to be building stronger backlogs,” he says. “I would expect modest improvement.”

Respondents outside the 48 contiguous states reported the most optimism. Hawaii, which lags behind in time zones, also lagged behind the mainland during the boom years of the late '90s. But, Gordon Loui of Hawaiian Rent-All, Honolulu, reports, “Indications are that the economy locally is on the upswing after a long period in the doldrums. Air and concrete equipment are moving briskly now, and those are the indications of job starts.”

Dani Haviland of Chillout! Parts & Equipment Supply in Anchorage, Alaska, says business prospects are improving considerably, and anticipates a 30 percent increase in fleet expenditures. Haviland pointed to the possibility of oil pipeline and gasline route exploration as a potentially strong source of business.

Haviland is not alone in anticipating strength in the oil sector in 2003. Rental people in Colorado, southeast New Mexico and Alaska anticipate that their communities will benefit from oil-industry strength. “This whole area is based on the oil industry and we expect the oil industry to be very strong this year,” said Teresa Shepherd of Shepherd Rentals, Hobbs, N.M.

Despite the uncertainty of the current economy, in recent months a spate of entrepreneurs have entered the rental business in the West, including some former managers who took the plunge to begin their own rental businesses. These people were willing to put everything they own on the line to start their own businesses. Armed with thorough knowledge of the rental industry's current conditions, they are still confident of success.

Most rental people in the Far West and mountain regions see the falloff in non-residential construction along with an unbalanced supply-to-demand ratio, with too many machines flooding the marketplace and too few jobs available, as the primary causes of the rental slump. And owners of companies of all sizes complain of rates that continue to plummet, possibly to all-time lows relative to investment. Smaller companies are quick to blame national firms, but branch managers of national firms also point to absurdly low rates charged by certain competitors.

And the uncertainty over the economy and possible terrorism or war plays a part in keeping projects on hold. As Thomas Dougherty of Royal Hawaiian Rentals in Kahului, Hawaii, says “World events, however they play out, will have the most effect on our business and our state.”

While the consensus is that the economy will, in most areas, continue to limp along, with a few but not abundant numbers of large new projects and the sense that this is not likely to be the time for major expansion, more than half of the owners in the West tell RER they expect at least a slight increase in 2003. And while that may not be quite the bright light at the end of the tunnel most are seeking, at least it's a lessening of the darkness.

Ray of Light

Rental business in the Midwest shines brightly on the homeowner and contractor segments, but other industry sectors have a less certain outlook.

By Brandey Chewning Smith, RER

At year-end RER annually surveys rental companies across the United States to determine how their businesses fared throughout the year and what they expect for the 12 months that lie ahead. The idea is to discern some sort of pattern that will help all of our readers prepare an outlook for the future. This year, however, the pattern is erratic. In fact, the pattern, at least in the Midwest, is that there is no real pattern.

Rental volume and expectations vary greatly even within individual states in the region. The outlooks of our survey respondents are largely hinged on the economies of the cities and towns where they are located. For example, a business in South Dakota recorded a banner year, while another in Texas was off from the previous two years.

One common thread, however, that runs throughout the majority of the Midwest respondents is a cautious optimism for 2003 and beyond. Many rental business owners in the region expect the economy to start to turn around by the second half of 2003.

A healthy housing market in the region has helped contractors and rental equipment providers muscle through the tough economy. Most of the Midwestern states are enjoying modest residential construction activity, in part because interest rates remain favorable. Some softness, however, has been noted in high-end home construction and sales. According to the latest Beige Book released by the Federal Reserve Oct. 23, both the Chicago and Minneapolis districts reported strong home building activity for September and early October. The real estate market in the Kansas City district was strong overall, while the activity in the single-family market tapered off in the Dallas district.

In those areas where residential building is strong, rental companies are expecting their small contractor customers to fare well in 2003. In fact, 73 percent of those surveyed in the Midwest agree that small contractor business will likely increase in 2003. No one reported a negative expectation for either small contractor or homeowner business, though 27 percent and 22 percent expect no change in these areas, respectively.

Trevor Harris, owner of Oak Grove Rental, Oak Grove, Mo., on the whole expects his customer base, which is primarily made up of small contractors, to be busier in 2003. “The contractors will stay busy due to the large number of housing starts in this region,” Harris says. “I think demand from this area will continue to increase as long as the interest rates are low. With all the mortgage refinancing, many homeowners are deciding to repair or remodel their houses. That creates a larger market for small contractors.”

In addition, many homeowners are taking advantage of the low interest rates to move up to larger homes. Regan Fader, president of Fader Equipment, Kalamazoo, Mich., expects high-end residential building to continue to provide most of the residential construction in her area. Still, others are taking advantage of the low rates to get home equity loans to make improvements to their current homes — either as do-it-yourself or small contractor projects.

“As jobs become more cost conscious, smaller contractors with less overhead will be getting more of the work,” says Fader.

“There has already been an increase in DIY homeowner rentals due to a slowing of the economy and financial uncertainty,” says Chuck Button, president, Button's Rent-It, Royal Oak, Mich. “The problem with these rentals is that the ticket totals are smaller and the time taken to instruct is longer. They tend to fill in for the contractor rental softness, but not totally. Hopefully we will find both segments doing more in 2003.”

Contractors in Button's area experienced a bad year in 2002 partially because of inclement weather, but he expects a slight increase in 2003.

Both Fader and Button are also anticipating a modest increase in DIY rentals as more homeowners choose to tackle their own projects. “That market had gone pretty soft as good times promoted having the job done,” Button says. “Now they are watching their bottom line a lot closer and doing more themselves.”

The outlook is guardedly optimistic for Nathan Hyde, general manager of Kendallville, Ind.-based Hayden Rental & Sales as well. “I expect that next year will be better for a few reasons,” Hyde explains. “First, the economy is likely to continue upward progress. Second, even in a sluggish economy people seem to want to invest in their homes, which is exactly what our general rental facility caters to. And third, we're starting to realize the financial benefits of a major acquisition of equipment about two years ago.”

Frankfort, Ind.-based Phil's Tool Rental Sales & Service is also counting on the low interest rates to stimulate more housing starts to keep his customers coming in. “We hope the lower interest rates, which are a positive, can equal or better the loss of jobs, the negative, so that our customers (contractors) can be busier,” said Rusty McQueen, president, Phil's Tool Rental Sales & Service.

“I think the housing boom in this area is keeping the local economy steady,” says Harris. “However, most other aspects of the economy are lagging behind. Sectors such as manufacturing and retail sales are performing worse.”

The story is similar for another rental business in McHenry, Ill., where the housing market has remained at about the same pace for the past four years and is expected to continue on pace through 2003.

Some rental companies are benefiting from big construction projects underway in their areas, which adds to their confidence for the upcoming year. Kendallville, Ind.-based Hayden Rental & Sales has both a hospital building project and a highway widening in the works and Stan Houston Equipment Co., Sioux Falls, S.D., is hoping for some projects to come from construction at neighboring Ellsworth Air Force Base.

“Our city is presently in a slow growth pattern and there are some big projects on the drawing board that might help us,” says Frankfort, Ind.-based McQueen.

Tim Johnson, president, Janesville Rental, Janesville, Wis., also anticipates some new jobs coming into town that should have a positive impact on rental business, particularly in the nonresidential construction segment, which is a varied growth area across the region.

Button's Rent-It is participating in some projects that, weather permitting, are expected to get underway in early 2003. Though Button thinks the large rental chains will garner the majority of the big construction jobs in 2003 he suspects that they will beat each other up on rates as they did in 2002.

Because of the lack of highway funding and municipal budget constrictions, most Midwestern rental businesses expect highway construction to be flat in 2003. Oil field services are expected to be slightly improved from their 2002 pace, however.

A number of factors weigh heavy on the minds of Midwestern rental company owners, including the instability of the stock market, fluctuation of oil and gas prices, weather, stability of interest rates, the looming threat of war with Iraq and the ominous possibility of another terrorist attack on U.S. soil.

“I think the ramifications of the actions in the Middle East will impact everyone in 2003. If not directly, then by altering the general outlook of the country and the uncertainty for the future,” Harris says.

Hayden Rental & Sales' Hyde sums up the hopes of most rental people in the region: “The economy has survived a cyclical stock market slide, the worst terrorist attack in history and massive corporate scandal — things are bound to go up!”

Southern Comfort

The year ahead may hold an upswing for rental businesses in the mid-Atlantic and southern states.

By Tony Tredente, RER

Although rental companies offered varied responses regarding 2002 rental revenues, the expectation in the region is that rental equipment customers will be busier in 2003 than in 2002.

In its Oct. 23 “Beige Book,” the Fed reported that the growth in home sales slowed somewhat in several areas of the Richmond, Va., district, and residential real estate activity remained generally upbeat since last reports for this region.

A Richmond real estate agent reported a “very active” housing market and noted that his agency's sales in September were 60 percent higher than a year ago. The rental companies are saying their customer base is showing a moderate increase in residential construction and that they are seeing demands in rentals for this market.

Rental businesses in the region unanimously reported that it would be a flat year in 2003 for non-residential construction and this was in line with the “Beige Book,” which found commercial vacancies edged higher in all segments, thus reflecting a soft demand as rental rates edged lower across all markets.

Highway construction will be trending on the upward side because of the continuance of major road construction well into 2003. Rentals to small contractors will most likely be on the flat side. Several large stores in the Carolinas reported that sales grew slightly faster, while retailers in the Tidewater area of Virginia noted little change in sales. In contrast, a contact at a builders' supply chain with stores throughout the district reported slower sales because of consumers' skittishness about the national economy.

The general economic growth in the mid-Atlantic region remained moderate in September and October tempered by declining manufacturing output and sluggish retail sales. Some of the equipment rental companies are saying the economy will be worse because jobs are being eliminated because of corporate downsizing. Another reason is that state governments are operating with budgets in the red thus affecting any governmental building in their region.

Most surveyed rental companies say they don't expect to spend more on fleet purchases in 2003. A factor that will impact the rental business in the coming year is an increase in competition, making the piece of the overall pie smaller, area rental owners say. The new competition over time will drive down the rental rates in this region.

The Southeast Region is also comprised of six states, including Louisiana, Arkansas, Mississippi, Alabama, Georgia, and Florida. Revenues from the Gulf coast areas of Florida, Alabama, Mississippi and Louisiana were flat and in some cases had declines of up to 12 percent in 2002, based on results from the RER survey.

Rental people in this region feel that the upcoming year will definitely prove to be better. They expect the revenues to move up from last year and remain steady for the entire year. The areas in south Florida have a very mature housing market and will be looking at a soft residential construction market. The housing boom on the Alabama and Mississippi coasts as well as the Florida panhandle in 1999 and 2002 has slowed, but construction of retirement housing will keep the growth steady for this coming year. Everyone agrees that the residential construction will be moderate to average showing a slight increase for 2003.

In the non-residential construction segment there are some large projects upcoming on the Gulf Coast and in south Florida, including some big governmental projects in both areas and possibly more than one casino expansion on the Gulf Coast for next year. Dealers along the coast are optimistic and view the casino expansion with great enthusiasm.

Industrial business will show some expansion but will remain steady in 2003 because of the usual ongoing maintenance contracts. Louisiana contacts are saying that the oilfield business will continue to be a steady part of their business as it was in 2002. Highway construction from Louisiana to the Florida panhandle has been ongoing and there are several more projects in the works.

The heavy earthmoving equipment rental segment could prove to be a bright spot for 2003. Surveyed rental center owners say they are likely to increase expenditures on fleet, especially in this area. They are considering the purchase of more equipment to broaden their inventory and buy new products to attract new rental customers.

Rating the Future

Pockets of strength will help certain rental companies amid a soft economy.

By Becky Bridson, RER

The Federal Reserve's Beige Book, a survey of nationwide economic conditions most recently released Oct. 23, describes the present economy in the Northeast region as “soft.” The report also says, “New England residential real estate markets are still strong, although contacts report slowdowns in some parts of the region. Uncertainty about the economy and lack of consumer confidence have dampened sales activity in some states.”

This couldn't be more true for James Smith, president of Moosehead Tool Rental, Greenville, Maine, who provides small tools, sanders, air compressors and other such items to tourists who escape to this small community in the summer. “When I say tourists, I mean tourists,” he says. The population year round is 1,200, but Smith says the number propels to 6,000 during the warmer months.

The tourists build what Smith refers to as camps near the community's main attraction — Moosehead Lake, a 20-mile wide, 40-mile long, 256-foot deep playground. Anytime someone wants to rejuvenate a camp and remodel or uptake some sort of a project Smith benefits. But with the sluggish economy, these customers haven't been doing as much remodeling, and the amount of new camps going up has slowed, both factors directly affecting Smith's business. He says the community sees one or two new houses going up a year but, normally, 30 to 40 camps, which run around $300,000 each.

Moosehead's revenue stayed about the same in 2002 as 2001. Smith predicts it might drop in 2003. “I hope I'm wrong. We had a big boom in the last seven or eight years. Now, people have bought lots and are just sitting on them, speculating. It's a better investment than the stock market. Unless the economy turns around, I don't think they're [tourists] going to spend,” he says.

Elsewhere, the Beige Book reports, the residential real estate market varies. “In Vermont and Rhode Island, the markets are slowing and low-end inventory is said to be building up. However, Connecticut and New Hampshire report active markets and continuing inventory shortages. In the New York-New Jersey region, permits to build both single- and multifamily homes fell in August 2002. Multifamily permits were still up 7 percent from a year earlier, despite a decline in New York City, however, single-family permits were down 11 percent from a year earlier. Homebuilders in northern New Jersey report that, while demand remains fairly robust, homebuyers are opting for less expensive homes, though many continue to spend a good deal on add-ons and amenities.”

New Jersey has also seen a “robust” amount of business in the event rental industry. Steve Kohn, president of Millers Rentals, Edison, N.J., tags 2002 as “an excellent year,” and expects 2003 to be even better. He says after having spent a good six months recovering from 9/11, revenues for 2002 increased by about 8.5 percent.

Kohn says the need for service-oriented business has increased in his area, and a lot of business has come from corporate clients who are having more home-based events. To accommodate customers, Kohn plans on buying much more new equipment in the coming year. “Our area (New York metropolitan, Tri-State) is doing everything possible to recover from 9/11,” Kohn says. “Major events are needed to show the country we are alive and well.”

As certain aspects of the business shape and direct the future, Kohn becomes increasingly enthusiastic. “E-commerce has been tremendously effective for us,” he says. “New markets have opened. The Web has become our trading area. I love competition; it only makes us look better. The more manufacturers consolidate, the better the buying opportunities for us.”