Rental Expectations -- Which Way Will the Rental Industry Go in 2023?

Dec. 16, 2022
Still solid demand faces inflation, supply chain pressures, interest rate concerns and labor shortages that help and also hinder rental.

Listening to the economic pundits discuss the overall economic expectations for 2023, there are a lot of concerns on the horizon. Inflation is on the mind of many. This is not just a North America problem but a global one. Russia’s invasion of Ukraine tends to top the list of concerns. With Ukraine being one of the world’s leading breadbaskets and its ports cut off for the most part, the shortage of grain may cause widespread hunger. And the cutting off of Russia’s oil and natural gas supply is creating a serious energy shortage with a long winter ahead.

Higher interest rates are causing reluctance among investors, which could affect construction projects. And the issues the rental industry has been facing – supply chain difficulties; equipment, chips and resource shortages; an ongoing labor shortage – are continuing concerns.

With all those headwinds to worry everyone, most people in the rental industry aren’t worried at all. Demand is high, rental customers are, for the most part, busy, there’s a lot of work in the books, and federally funded infrastructure projects are getting going. So, while for the most part a continuing cycle of growth is expected, overall the rate of growth is slowing down.

In some ways the global economic uncertainty is beneficial to rental.

“We expect 2023 will be another year of growth,” says Kurt Barney of Vandalia Rental, Vandalia, Ohio. “We don’t think growth will be as robust as 2022, but we believe given the uncertainty and volatility that exists virtually everywhere, equipment rental demand will remain elevated.”

 Another Ohio-based rental company owner Glen Leppo of Leppo Rents and Bobcat of Ohio, sees overall strength but a bit of a mixed bag. “Overall, I am expecting 2023 to see increased rental demand in some markets with others softening considerably,” Leppo says. “As opposed to the demand from all markets we saw earlier in 2022.”

“We think revenue will be flat to up slightly,” says a slightly less optimistic Walter Berry of Berry Companies. “Interest rates will definitely hurt housing, but non-residential is still forecast to grow slightly in most of our markets.”

The increase in infrastructure spending is beginning to be felt more and location may play a part in how beneficial it is.

“We expect continued growth in 2023,” says Anthony Durante, Durante Rentals, New Rochelle, N.Y.  “NYC and surrounding counties always have a steady flow of projects due to infrastructure spending.”

“Overall, things are looking positive for 2023 but we will need to keep an eye on some key factors including inflation, higher overall costs, and supply chain issues,” says Michael Frey, regional operations manager-rental, for Finning Canada. “If interest rates continue to climb and the economy softens as predicted, we may see customers begin to adjust their plans with regards to capital spend. This could lead to slower growth in overall demand for equipment. With the significant increases in pricing for new equipment, combined with continued backlog due to supply chain issues, rental should continue to be an attractive option to many customers. These factors, combined with high interest rates on financed equipment, may drive contractors to pursue the lower-risk, and at times necessary, option of rental to meet their equipment needs.”

What say the customers?

More than anything else customer demand will drive the year’s rental economy. While economists’ predictions are important, as are macro-economic reports, it’s how busy customers are that will drive the success of the market.

“Our customers are telling us they expect the year to just as busy as 2022,” says Bruce DeFord of National Lift Truck, Franklin Park, Ill. “They are continuing to quote and win contracts for the foreseeable future.”

 "There is a large backlog on projects getting started,” says Durante. “While we were anticipating these projects, we do have concerns about market confidence due to inflation, interest rates, labor shortage, and supply chain lead times. The unpredictability of costs and timing of materials could add millions of dollars in cost to a finished project.”

“Most of our customers are reporting a strong backlog of work going into 2023,” says Steve Brown of Louisiana Cat. “Everyone seems to see a slower growth rate in 2023, but outstanding jobs are driving a view that activity should remain the same or increase next year.”

 “There's a certain level of readiness and expectation from most customers for the market to continue to be strong through 2023, despite very real pressures on labor availability, rising equipment costs and inflationary pressures,” says Guy Manuel, Stephenson’s Rental Services, based in Toronto, “Home builders, along with general contractors working in the commercial and infrastructure segments, are most optimistic that 2023 will continue to be strong. Although it is widely expected that there will be some softness in new housing starts, there is still strong demand as we are coming off all-time highs. Add on top of that, the Canadian government's desire to aggressively increase immigration levels once again and we believe any slowdown on the horizon to be temporary.”

Again, good news coming from Ohio.

“Some customers are still saying their backlogs are the longest they’ve seen in some time,” Barney says. “Very large projects that took years to plan are just now becoming shovel ready and the impact of the most recent infrastructure bill hasn’t even been felt. In Ohio — where we’re based — two of the largest projects Ohio has ever had are now running simultaneously. We anticipate the trickledown effect of this to carry activity into 2023 and beyond.”

Some customers aren’t quite as optimistic.

“We are still seeing customers with substantial backlogs due to our geographic location,” says Ryan Herring of High Reach Co., Sanford, Fla. “A few have indicated to us that the cost increases they have seen over the last few years are reducing margins to unsustainable levels causing them to push suppliers and subs to tighten budgets and forgo some projects that have higher cost of capital.  We are seeing more concerns in the residential industry than others.”

“Some home builders of larger homes are more pessimistic,” says Berry. “The question is will they build less expensive homes. Most are currently busy, but cautious about next year.

“Based on customer feedback, we expect 2023 to be about the same as 2022,” says Scott Cannon, CEO of BigRentz. “The key concern is inflation and if the Federal Reserve will get it under control without over-rotating, putting the country into a deeper recession than anticipated. Customer optimism is mixed and looking past the end of 2023, project backlogs are more uncertain than this time last year.”

Colin Grill of Aaction Rents, Windsor, Calif., says customers are feeling the effects of rising interest rates. “A lot of jobs, residential and non-residential, have hit the pause button.”

Long time coming

A continuing issue in the rental industry – in fact just about every industry these days – are the lengthy lead times to obtain manufactured equipment. In fact, a Caterpillar rental leader said he’s still waiting on a Ford Lightning he ordered two years ago.

“Very few lead times have improved,” says National Lift Truck’s DeFord. “Most have stayed long or gotten worse than the first half of 2022.”

Durante calls lead times “ridiculously long.”

“While there are glimpses of this shortage easing up, there are still a large majority of vendors who have six- to 12-month and beyond lead times,” he says. “Our hope is this normalizes by end of 2023 and with this, removal of surcharges and downward pressure on pricing as manufacturers have excess inventory.”

“Lead times are still 12+ months and consistent with the last couple of years,” says Herring. “Some manufacturers are still not providing quotes for specific models due to their inability to provide.”

Vandalia Rental’s Barney says some of the larger manufacturers are improving lead times somewhat.

 “They’re still not where we’d like them to be, but we’re starting to see fewer delays, which allows for better overall planning.”

Some say lead times are a bit better and more model/category specific, some even say worse. Bob Kendall of Star Rentals says the key has been ordering so far in advance that the machines come almost when they are needed.

Price increases

Obviously when things are difficult to obtain, and customers are willing to pay more for them, they are willing to pay more, and prices go up. And it should be well understood that manufacturers face similar challenges. They can’t easily source everything they need to manufacture equipment, so delays are inevitable and their costs go up as well. That’s why they call it a supply chain. And rental companies are forced to raise rates as well.

“With the elevated costs we experienced in 2022 we had no choice but to ‘share the pain’ and increase rental rates,” says Barney. “Overall, we’ve seen real rates climb approximately 5 percent year to date. Our rental rate expectations for 2023 are similar to our revenue projections, they’ll continue to grow, but at a more moderate pace as stability begins to set in.”

“Price increases seem to vary by vendor,” says Louisiana’s Brown. “We are still seeing some step level increases while other vendors are signaling more moderate increases in 2023. Our expectation is that interest rates and supply chain issues will continue to influence manufacturers’ pricing through 2023.”

“In addition to price increases manufacturers are still adding surcharges to machines at increasingly higher rates,” says Herring. “We expect this to continue for the next couple of years as companies do not have any other options and need the machines due to current utilization levels.”

For some rental companies, the current environment is de-stabilizing. “Higher labor costs and inconsistent lead time for parts and equipment are making it difficult to manage rental assets efficiently. We may take a step backwards next year in order to reset,” says one respondent to the quarterly Baird/RER Equipment Rental Survey.

Another respondent says he can't get equipment or parts in a timely manner and that the problem is worsening instead of getting better.

While prices have increased markedly during the past couple of years, in reality these increases come off a decade with very little markup.

“We went back and looked at what we were paying for scissors, booms, reach forklifts, etc. in 2012 and now in 2021,” says Star Rentals’ Kendall. “There was very little inflation over the past decade. If you were to compound an annual increase each year starting with 2012 (say 2.5 percent) over the next 10 years, you would have pricing higher than what we are paying today. Star Rentals did a rental rate increase in January 2022 and we just did another in October. Delivery charges, markup on ancillary items, fuel, etc. have been adjusted to market conditions.” 

With the large increases in costs of new equipment, and the resulting hike in the cost of used, rental companies have raised rates out of necessity.

“Given the higher price for equipment, higher labor costs. and the higher interest rates, I know that price increases are justified,” Leppo says. “The real issue will be whether demand holds up. In times of falling demand for rental, there seems to be no bottom among some industry participants.”

Non-residential takes the wheel

As 2023 approaches, the non-residential construction segment appears to be in the driver’s seat as far as rental is concerned. Industrial and road construction looks solid depending on particular companies’ market areas. Residential construction does not appear strong, although multi-family construction might do decently, according to rental people.

“Non-residential construction has always lagged the economy and thus is likely to hold up best in 2023 as things slow,” says Leppo. “A big part of this is just the time from design through construction on a non-residential project is typically measured in years. Non-residential is also not quite as interest rate sensitive as residential construction.

“Single-family housing is going to have a weaker 2023 than 2022. Starts are dropping rapidly as the Federal Reserve has been clear that they plan to hold rates higher than the market expects. A realtor friend told me that the monthly payment for a $200,000 house today is the same as a $300,000 house six months ago. Multi-family will likely hold up better. We still need more housing in this country. Unlike 2008, we haven't overbuilt due to supply chain issues and labor constraints. Low rental vacancy rates are likely to positively impact multifamily construction.”

Ryan Stallings of Ring Power expects to see continued strength in road building, infrastructure and industrial.

Kevin Fitzgerald, CEO of Rental Equipment Investment Corp., agrees. “We see non-residential and industrial being strong markets in 2023,” he says. “We are not expecting any growth on the residential side.”

“We believe non-residential and public works will outpace the other markets,” adds BigRentz’s Cannon. “We would expect, given rising interest rates and consumer debt, and flat to decreasing residential values, that the residential and DIY segments will slow.”

“Our market is dominated by petrochemical and we see strong growth opportunities next year,” said Louisiana’s Brown. “Also, we believe that infrastructure investment will begin to materialize into opportunities in 2023 as well.”

Stephenson's Manuel sees different dynamics at play in Canada that will be more friendly to the housing market.

"Our residential builders are likely to feel the short-term impacts of high interest rates and market uncertainty, but this segment is also being backed aggressively by both our provincial and federal governments to address the housing affordability crisis and to proactively be ready to house a significant increase in immigration,” says Manuel. “From a general contractor perspective, our customers feel extremely confident for 2023 given the enormous increase in permit values moving into the start phase. In addition, our governments continue to release a large amount of infrastructure work into our markets to aid in overall productivity and future growth.”

Is inflation peaking?

Inflation is a big issue in the overall economy. But how does it impact the world of rental? There are positive and negative impacts.

In some ways, the uncertainty benefits rental as customers are more nervous about making their own capital investments.

“We expect inflation to peak and begin to moderate in 2023,” says Barney. “When there’s uncertainty in the economy, customers don’t feel as confident making the long-term commitment to purchase equipment, oftentimes opting to rent instead. We feel this mindset will continue into 2023 until there’s more visibility, keeping equipment rental demand near current levels.”

Thinking in a similar manner, Ring Power’s Stallings says, “We expect rental to be a growing alternative for customers not willing to accept machine sales price increases and finance rates.”

On the other hand, points out Cannon, “Rising interest rates will have an impact on construction projects and there is no avoiding an impact on the rental market. That said, the industry continues to enjoy tail winds like increasing rental penetration and multi-decade lagging infrastructure spend compared to U.S. GDP growth. Certain segments will be impacted more than others, but as an aggregate, the rental market should continue growth next year.”

In essence, as Louisiana’s Brown says, “inflation and interest rates will be a double-edged sword for the rental industry.” Inflation will make rental a more attractive option for the customer, but it will also drive up costs, which will have to then be passed on to the end user for the rental business to be sustainable.

The labor issue

A major concern in the rental industry, construction overall and just about every business area these days is lack of labor – skilled and unskilled, it is difficult to find people to do the work. Some construction projects have stalled because the project managers can’t find enough workers. Some rental companies have had to put expansion plans on hold because they didn’t have qualified staff. And rental companies have had to find ways to be more efficient, to get more work from fewer employees. There seems to be no easy answer and many rental companies have had to creatively figure out their own programs to find, hire and train staff themselves.

“We brought on full-time sales development coaches, recruiters, career/open house hiring events, and increased focus on technical and safety training,” said Ring Power’s Stallings. “All utilizing in-house resources. We significantly raised compensation in the areas of highest need, such as technicians, drivers, and skilled labor.”

“We are continuing our apprentice program,” says Mike Appling of TNT Crane & Rigging. “We need people bad.”

Finning’s Frey says Finning is taking a number of steps to create competitive and meaningful job opportunities, including market-competitive pay, comprehensive benefits packages and a flexible work-life balance.

“There are a number of diversity and inclusion programs underway that focus on attracting and retaining talent and encouraging a more diverse group of people to enter the industry,” says Frey. “The construction industry in general still has a lot of work to do when it comes to equitable representation, but the good news is things are improving. Diversity and inclusion are major priorities for us and our focus for 2023 is to continue attracting the best talent from a wide range of backgrounds.

“Technology and upskilling are other key tools used to help secure a strong future workforce,” says Frey. “Technology can be useful to help attract workers that may be considering a career in the industry. To the younger generation that has grown up with technology at their fingertips – drones, machine control, automation, remote control operation, and AI are all great ways to get them excited about a career in construction. Finning also partners with schools and organizations, supports youthful STEM programming, and offers bursaries and financial supports to develop the next generation of skilled workers.”

“We’ve been focused on internal training at all locations to include both operator and service,” adds Chris Pera, chief operating officer, Able Equipment Rental. “Able has leaned more towards the full-service product offering, which requires plenty of customer training and to do so, we must continue to improve training

Labor concerns also can benefit rental in reverse. The same trend obviously exists in the construction industry. With the lack of technicians to repair their equipment, contractors prefer to rent and let the rental technicians maintain the machinery.

“Most of our big customers have a backlog of 12 to 18 months, so near term should stay highly utilized,” says a Baird/RER Survey respondent. “We are seeing big companies lean more on rental companies because of the labor/skilled mechanic shortage and foresee that to be a trend going forward.”

Fifty-five percent of respondents to the survey expect labor costs to increase 5 to 10 percent in 2023, while 23 percent expect 0 to 5 percent wage inflation and 18 percent expect wages to top a 10-percent hike.