Baird/RER Survey Respondents’ Revenues Jump 10.8 Percent in Q2; Softer Growth Expected in Second Half

July 15, 2023
Expectations for the third quarter are for a 5.6-percent increase and 8.3 percent in the fourth quarter.

Revenue for respondents to the Baird/RER Equipment Rental Surveys rose 10.8 percent year over year in the second quarter, after a 10.9-percent increase in the first quarter. Expectations for the third quarter are for a 5.6-percent increase and 8.3 percent in the fourth quarter. Baird noticed some cautious commentary regarding demand trends. A net 22 percent of respondents (revenue weighted) reported revenue and utilization higher than their initial budget for the second quarter. Rental rates rose 2.3 percent year over year, and forward rate outlook dropped to 3.1 percent as new equipment lead times continue to improve.

Seventy-two percent of respondents said the second quarter was in line with expectations. With 22 percent reporting better-than-expected results, 6 percent said results were worse than expected. The 16-percent net positive is less robust than recent surveys.

On a positive side, funding from the Infrastructure Bill and CHIPS Act lead to incremental activity, and several megaprojects are in the works providing visibility on demand into 2024. And homeowners are still investing in their residences, both inside and outside.

On the more negative side, higher costs and funding hurdles are slowing the pace of new projects. Pockets of delays and project pushouts are starting to emerge, some because of incremental regulations, other because of needed rebudgeting given cost inflation. Also oil and gas projects are slowing. A more mixed perspective is that existing projects should carry the nonresidential market in 2023, but the chance of a slowdown in late 2023 or 2024 seems likely.

Respondents are expecting a 5.6-percent revenue increase in the third quarter of 2023. That’s compared to the second quarter when a 10.4-percent growth clip was expected, and actual growth for respondents was 10.8 percent. Sequentially, the slowdown is because of the emergence of a handful of respondents expecting revenue declines and a growing number seeing flat year-over-year revenue. Average rental revenue is expected to rise 8.3 percent in 2023, implying a fourth quarter revenue growth of about 6 percent compared to 2022.

“The beat goes on,” says one respondent. “Customer backlogs holding steady. Office construction contracting but distribution and mixed use continues on a steady pace. Educational, institutional and industrial flat to modestly improved.”

“Commercial construction markets starting to show signs of slowing, and seeing more issues with job delays and staffing,” reports another. “We are starting to see smaller contractors have issues with jobs and payments.”

Fleet utilization was 60.8 percent compared to 62.3 percent in the second quarter of 2022. The third quarter of 2022 achieved the survey record high of 67.9 percent. The utilization rate for Access Equipment (consisting of 34 percent of survey revenue) rose to 65.8 percent from 62.1 percent in the second quarter of 2022. The utilization rate for earthmoving equipment, which amounts to 33 percent of survey revenue, decreased to 64.6 percent from 65 percent in Q222. Small iron utilization dropped from 53.3 percent a year ago to 50.1 percent in this year’s second quarter.

The average rental rate increase of 2.3 percent year over year was lower than in the previous seven quarters when it ranged between 3.7 percent and 4.8 percent. Expectations for rate growth moving forward are lower as well, with an expected hike of 3.1 percent in 2023. The slowdown in rental rates at this point is more related to increased equipment supply rather than demand erosion. Competition has also increased with smaller operators returning to the pre-Covid theme of pointing to aggressive pricing by national rental companies.

Improved equipment availability

New access equipment availability and lead times are showing clear improvement. Twenty-three percent of respondents (equal weighted) report that access equipment availability has gotten better during the past three months with 28 percent reporting that availability has gotten worse. On a revenue-weighted basis, only 14 percent of respondents reported worse conditions, while 33 percent saw improvements, as larger buyers have better ability to secure access equipment.

A net of 30 percent reported improvement in availability of earthmoving equipment.

Average fleet size in units increased 4.8 percent year over year in the second quarter of 2023 – growth has ranged from 3.1 percent to 6.5 percent in each of the past six quarters. Unit growth was up 4 percent for access equipment, 3 percent for small iron and 6 percent for earthmoving. Respondents’ forward capex expectations soften with revenue weighted spending now decelerating to the lowest level in two years.

“We flexed our balance sheet strength and added units early,” said one respondent. “Now that supply chains are normalizing, we’re not buying anything close to what we did in the prior two years in part due to high equipment pricing as well as lower utilization.”