RER: A year ago, expectations were that 2023 would be a slowdown in terms of the overall economy, and that the rental market would be slower as well. It seems that 2023 was a better year than anticipated in the rental industry. Would you agree with that?
Dobre: If you look at 2023, a lot of folks, myself included, expected a negative impact of interest rates going up and capital becoming less available. To your question, 2023 was a more robust year than a lot of us anticipated. And much of this has to do with the fact that the impact of interest rates took longer to manifest. The other thing has to do with the various stimulus packages, the Chips Act, the Infrastructure Investment and Jobs Act. and the Inflation Reduction Act, where we have seen a lot of activity in 2023 related to manufacturing, reshoring and chip production. I think those were factors that made 2023 a better year. Number one, it’s taken a little bit longer to feel the effects of higher interest rates. And then, second, the manufacturing and reshoring of components have been very very strong.
Let’s look at 2024, the larger economy. The general sense from what I read is that 2024 will be more of a slower pace of growth, with some economists expecting perhaps a short, mild recession. Do you expect that? What about in the rental industry?
It’s hard to know whether or not we will get a recession. There are a lot of indicators that we probably will. But, the market increasingly, in both equities as well as rates, seems to point to a soft landing. Not a recession; just a moderation. The debate is out there, I don’t know which side is right, but I will say about the rental industry, that growth is likely to slow. That’s consistent with the forecast from the ARA.
We see a combination of a couple of things. On the manufacturing, reshoring front, and construction activity, we are starting to see that with large growth numbers it’s harder to grow off much bigger numbers, while other pockets of construction activity, which we know are very important to rental, are actually showing some signs of softness, of a decline. The effects of interest rates are impacting areas like commercial construction, warehouses, office, hotels, things of that sort. That’s where we’re seeing construction contracting starts actually come down. So I think a combination of all that is going to result in a slower 2024.
Last year you made this prediction: “In our view, growth in non-residential is going to remain robust in 2023 with 8 percent growth. But in 2024 we’re going to see a slowdown to 4 percent. What keeps it still growing is the fact that there’s going to be quite a bit of investment in the manufacturing vertical of non-residential construction.” Did that turn out to be accurate and what do you expect for 2024 now?
Was it robust? Yes. Was it 8 percent? No. It was more like 21 percent! The growth in non-residential construction greatly exceeded what our initial forecast was. And I think that is a function partly of inflation, but a lot of it goes back to what I said about the timing of higher interest rates and how that flows through. As well as the reshoring of manufacturing. And just to give you some context her -- because I think this context is helpful -- If you look at manufacturing construction, it grew 71.5 percent in 2023. Manufacturing is now the largest component of private non-residential construction.
When you have the largest category of private non-res growing at that pace, it’s fair to say that we were not forecasting something as significant as that and as quick as that. And that created a big variance. But in terms of the other verticals within non-res, that have taken a little bit longer to be affected by higher interest rates, things like office, you might be surprised to know that for all the concerns that we had out there with commercial real estate vacancies, office actually grew about 8 percent. It’s pretty clear that that’s not going to be the case going forward, but it’s just taken a little longer for these categories to start slowing down.
The second part of your question on what we expect for 2024. We still expect a slowdown in 2024, but growth is going to be better than 4 percent. Now we are expecting somewhere in the mid-to-high single-digit range. But the year in our view is going to be bifurcated. We’re going to start strong, there’s still work and projects in the backlog, but we’re going to start to see a much slower second half of 2024, which we believe is going to carry over into 2025 as the backlog of work is being worked through.
How about residential construction?
Residential has been a tough market this year as you probably know, and a lot of your readers know. This is a market that’s been bifurcated. Within residential construction, if you look at remodeling and repair, that market’s been down about 5 percent in 2023. If you look at single family homes, the construction spend on single-family homes was down about 15 percent this year. Multi-family has grown. Multi-family has been up about 20 percent. What we’re starting to see into 2024 is that there’s going to be a bit of a switch where the declines in single-family homes are going to moderate and in the back half of 2024, we’re thinking and expecting single-family to grow on a year-over-year basis, especially if interest rates start coming down a bit.
There are more headwinds on the multi-family side where even though there was growth in 2023 on a pretty sizable backlog of projects, because of higher interest rates and lower capital availability we have seen starts -- the front end of multi-family projects -- come down quite a bit and we think that’s going to start impacting that activity in 2024.
So single-family we think is actually going to be up a little bit, especially in the back half of 2024, but multi-family is likely to come down. And the path of interest rates is going to be super important here because if indeed the market is correct in its assertion that the Fed will reduce interest rates multiple times in 2024, then I think that sets up residential in general, single- and multi-family for a much better 2025.
Has the onshoring or reshoring trend in manufacturing been as strong as expected? Do you have expectations in this area for 2024?
It’s been much stronger than we initially anticipated. In terms of timing, it happened quicker, and with greater magnitude. In fact, this is the strongest investment in manufacturing construction that I think we have seen in a generation. That’s how strong this has been in 2023. So onshoring is very much real.
Has the Infrastructure Investment and Jobs Act been as successful as hoped as far as creating actual projects? What are your expectations for 2024 as far as IIJA projects? Last year you predicted public nonres spending to rise 10 percent in 2023.
Public non-res was actually up 15 percent. Our number proved to be too conservative relative to what actually happened! The variant was not as big as what we’ve seen on the private side. But still, public was better than what we anticipated. When you look into what were the areas that had the best growth on the public side and there’s many, we have seen a lot of growth in sewage and waste disposal and in water supply. We have seen very very good growth in street and highway and also in transportation. So the funding from the IIJA is starting to flow through. We’ve seen this happen in 2023, and we think that continues in 2024. I think the public markets are going to grow double digits in 2024 and frankly that’s going to have staying power into 2025. We are expective above normal growth there.
The national companies mention that there are a lot of mega projects in the pipeline. Do you expect a lot of them to get started in 2024 and will they have a large effect on the construction economy?
Yes, a lot of mega projects have already been started. This is not just something that’s going to happen in 2024, it has already started. So when you look at semi-conductors, if you’re talking about Intel’s facility in Ohio, or the one in Arizona, these are projects that are already underway. That has generated this sizable growth in non-residential construction into 2023. So, again, the law of large numbers. Keep in mind that while these large projects are ongoing, delivering outsized growth on this now much higher base is going to prove to be a little bit difficult even should those mega projects continue.
So I think we’re beyond the initial growth surge. Now we’re getting to a place where the question is going to be now is it all sustainable? And how long can we benefit from these tailwinds. I personally think that this is sustainable into 2024 and even into 2025, but we’re certainly not talking 20 percent growth, it’s going to be much more moderate than that.
Some rental companies are saying the supply chain issues have greatly improved and equipment is more available now, and thus there’s a lot more equipment out there, leading to more competition and more rate pressure? Do you see this as a general trend? Is the supply chain a lot better?
This is a great question. I think this question is extremely important to all your readers. The short answer is yes, absolutely, the supply chains have improved. The suppliers to the rental industry, the older machinery companies, JLG, Genie, Deere and many others, their production rates are increasing, and more equipment is coming to the market. Rental operators are also seeing that used equipment prices are coming down. The combination of higher new equipment supply and lower used equipment prices is pointing to the fact that the supply of equipment in the market is increasing.
That will lead to more competition and possibly more rate competition. And that’s going to be interesting to see how the industry manages that. Historically we have seen lower rental rates when the supply of equipment increases. Yet many national companies are saying they are going to try to manage that very carefully, and they’re willing to sacrifice utilization to keep stable pricing. That will be an interesting dynamic to watch in 2024.
I often hear the phrase “This is an election year, so things will be slower.” Not only in the rental industry but elsewhere as well. Will that really be a factor?
I personally don’t put a lot of stock in the notion that in an election year things are slower. At the end of the day, I think that a lot of decision makers, whether it’s rental companies that are buying equipment or their customers that are starting a project, I don’t think an election year is what they are basing their decisions on. At the end of the day, they are looking at projects that they have in the pipeline, what kind of capital needs do they have and whether capital is readily available. If those conditions are met, they’re going to invest.
But elections do create some instability with regards to the longer-term outlook, right? One of the factors within this particular election is the two parties have differing views on things like electrical vehicles and clean energy subsidies. The components of activity that are associated with battery energy or things like wind or solar, those portions of the market are the ones that are most likely in my opinion to be impacted by the election outcome. If there will be some trepidation, it’s probably for the rental companies that have more exposure to those end markets than anything else.
Is the labor shortage still a major problem?
It is a challenge but from everything that we hear it’s not as acute as it was 12 months ago. The labor market has stabilized; wages have stabilized as well. We’re not back to where we were pre-Covid for sure, but it’s definitely not as challenging as a year ago.
Is the pace of consolidation likely to increase or decrease?
I suspect we remain in an industry that will continue to consolidate. We’re seeing a growing number of companies that are interested in becoming consolidators. United Rentals has been active for a long time, we know that, but we’re seeing Herc become increasingly active, Ashtead is active as well, H&E also. So I would say the pace of consolidation continues.
What about the cost and availability of capital in the coming year?
Cost and availability of capital has been an issue and I think it has been an issue particularly in the second half of 2023. Interest rates, as we all know, have been considerably higher. It really doesn’t matter if you’re talking about financing the purchase of a machine or even at the consumer level, if you’re talking about getting a mortgage or a car loan, you know financing a car can run as much as 9 to 11 percent these days.
Those are all real expenses that buyers of capital goods have to take into account. The market does seem to point to lower interest rates going forward and you’re seeing that in the government bond market, we’ve seen that in lower 10-year treasury rates, which are really the benchmarks that everyone is paying attention to. Roughly 60 days ago, the 10-year government benchmark was nearly 5 percent. Today [in December 2023] we’re looking at it and it’s below 4.2. The market seems to want to price in multiple interest rate cuts by the Federal Reserve in 2024, which again if true would be greatly beneficial to not just capital costs but capital availability for both the rental and the construction industry.
Any there other sleeper non-res markets that might be strong or important for rental?
Really the star of the show has been manufacturing. The other sleeper market I would have to say would be power, electric power. If you look at power markets, this is a $90 billion per year market, so it’s sizable, it’s a little bit larger than office. And this is where there’s a lot of need and a lot of funding that’s been provided by the various stimulus bills, so if you look at grid stability and insecurity, reinforcing the grid and expanding the grid in some cases, I think there’s going to be a multi-year expenditure in the power markets. Now, it’s a very specialized area in the rental market and I know many of your readers are not active in that area but that’s one we’re sensing there’s going to be growth in and there’s going to be stability, a lot of funding. So you’re not going to see the same fluctuations that you see in commercial construction or office or something like that. So that would be one market that I would highlight for you.
I suspect that your readers that have an exposure to government markets, whether it’s education, or road construction, bridge, water, airport, rail, they are going to be very good for the next couple of years. These are going to be areas of growth, these verticals are going to grow regardless of what is happening with the broader economy, regardless of higher interest rates, simply because the funding there is really not driven by the broader economic cycle.
