December Rental Sentiment Index survey results cap off a strong year for the North American equipment rental industry, with participants "looking forward to a substantial activity increase in early 2015" with a belief "that 2015 will be an improvement over 2014."
The Rental Sentiment Index, a partnership between Piper Jaffray and RER, remains strong despite concerns over oil prices. The RSI registered 6.2 in December, consistent with last month's 6.3 score and recent expansionary readings between 6 and 7.
While much of the country has celebrated lower prices at the pump, declining oil prices have created concerns over the potential impact to energy-related expenditures and local economies tied to oil. This month’s survey found, however, that these concerns are not reflected in overall equipment rental expectations for the next 12 months in North America.
Survey participants acknowledge declining oil prices can have an impact on upstream oil construction at some point in the future, but overall rental demand remains "strong" with expectations of a "substantial activity increase early in 2015," survey participants said. Some even note rental activity in December is unusually strong for what is normally a slow month. In fact, lower oil prices are usually an intriguing potential source of economic stimulus for overall construction and associated equipment rental activity, according to survey participants.
As the year comes to an end, overall sentiment in the equipment rental
industry continues to show positive momentum, with 60 percent of survey participants indicating their industry growth outlook for the next 12 months is "slightly improved" or "significantly improved" compared to November. Survey participants also indicate that they are expecting higher rental volume growth of 5.3 percent over the next 12 months compared to 4.6 percent growth expectations last month. Time utilization projections also ticked up from 49.2 percent to 53.0 percent, indicating improved fleet efficiencies and expected equipment demand.
In a period of typical seasonal slowdown, the survey indicates "rental rates are still holding strong" and there is "continued development" in real estate.
Secular trends continue to play out with "small contractors staying busy, but not yet buying new equipment," while cyclical trends look to provide persistent and healthy growth, with participants "preparing for double-digit growth for the next 3-4 years."
Within the equipment categories, there is "high demand in telehandlers, excavation equipment, traffic safety, as well as air compressors and generators." These insights reinforce analysts’ projections that the industry is in the early innings of a multi-year expansion cycle for equipment rentals. Some survey participants note concerns that Tier 4 emission engines will add significant cost to capex in a rate environment some still see as weak.
The RSI is based on a 10-point scale, where readings above 5.0 indicate expansion, and is derived from expectations for North American commercial and industrial construction equipment rental revenues, volumes, rates, time utilization and capex. A 6.2 reading indicates moderate rental expansion, which industry experts consider to be the optimal growth environment for equipment rental companies. Moderate industry growth encourages the ongoing secular-penetration of rentals and mitigates against over-investment in the rental fleet.
Piper Jaffray is an investment bank and asset management firm, serving the needs of corporations, private equity groups, public entities, non-profit entities and institutional investors since 1895. It is headquartered in Minneapolis.
RER has covered the equipment rental industry since 1957, providing its readers with a mix of news, features and product information.