A Mixed Bag in 2026

Mircea “Mig” Dobre, senior analyst – machinery & diversified industrial, institutional equities & research for Robert W. Baird & Co., has been covering the equipment rental industry since 2010. He has been sharing Baird’s insights with RER for more than a dozen years. In the following interview, he discusses the economy as it pertains to construction and the rental industry, along with insights into the burgeoning data center market, his expectations for residential and nonresidential construction, the growth of rental in the coming years, and more. (The following interview took place in mid-December before final numbers for 2025 were available.)

RER: How do you sum up 2025 and what kind of economy do you anticipate for 2026 in relation to construction and rental markets?

Dobre: The economy is a bit of a mixed bag. There are some pockets of extreme strength, but also some areas of weakness. Without a doubt consumers have struggled. Your readers have less exposure to consumer end markets, but consumers have struggled and related to that, housing has struggled. Questions of affordability have really put pressure on individuals. And if you look at other areas of the economy, whether it’s restaurants or retailers, they all talk about the struggles that they’ve had in dealing with tariffs and the pressures they have generated on consumer spending and overall spending.

We’re seeing kind of a multi-decade capex and investment boom that is driven by artificial intelligence and the infrastructure surrounding that. The economy has been bifurcated at a high level because of that. And when you look at equipment rental companies and the activity that they have seen, that can trickle down to them as well.

2025 has been characterized as very good demand from mega-projects and you have seen this in the comments of our joint survey over the past three or four quarters. Mega projects are doing well but the smaller projects, the more local business that is more exposed to housing and more exposed to commercial construction, that’s been challenged. So that’s the best description for 2025, almost like a two-tiered economy. Big investments are doing really well, but many of the other portions less well.

Looking forward into 2026, what are your expectations?

In 2025 our forecast was a little more optimistic than what reality turned out to be. Where the variance was most pronounced was actually in residential. Residential has absolutely struggled, we kept thinking we were going to see some growth, but we did not. U.S. construction spending is on track to decline 1 to 2 percent in 2025, with about a 2-percent decline in residential.

In non-residential the year pretty much played out the way we thought it would. Overall construction activity we think will actually grow; it will grow at a modest clip. We’re certainly not expecting 5 or 6 percentage points, we think it will probably be 1 to 1.5 percent. And it’s going to be bifurcated. The rental markets are backlogged businesses. It takes time to start a project. Once the project starts it takes some time before it can get fully ramped up and have the equipment going and really have that construction process underway. Which means that given what just happened with construction starts, we think weak activity bleeds into the first half of 2026 and eventually starts to get a little better in the second half. 

But one of the things that is critical here is that we are very much in need of lower interest rates. We have an assumption that interest rates are going to be more cooperative in 2026, which means we can start to see a little better traction, a little more demand in the second half of 2026, and a gradual acceleration in 2027.

The data center market is extremely hot. Why is that and what are your expectations for this market? 

The data center market is very hot. If you look at data center construction, we are seeing 40 percent growth after 60 percent growth, so these are very significant numbers, and this is just construction activities. There is so much more that goes on beyond the actual construction itself, in the building down below, in the data center. The amount of equipment that is housed in the data center is very very significant, almost anything that you find in any highly specialized manufacturing facility. The amount of dollars we are talking about here is frankly staggering, even relative to a U.S. economy that is very large. It’s because of artificial intelligence, which is evolving very rapidly and finding a lot of uses and is starting to penetrate a number of industries. A lot of infrastructure is required. 

Still, data centers account for less than 1.5 percent of construction. But they are growing at such a rapid pace that if you’re in the construction business, if you’re a contractor, or a rental company, at this point you probably have somewhere close to your footprint or in your footprint at least 1 percent of these projects going on. 

The U.S. construction and U.S. rental markets are not primarily driven by data centers.

Where I think there could be some differentiation is in who in the rental industry actually has an opportunity to participate in data center projects. Because being so large and requiring so many different types of equipment, data center projects kind of lend themselves to operators that have a lot of scale.

These are operators that have the ability to provide 1500 units on one project. When you’re dealing with someone who is more of a local operator or even a regional operator, they might not have that, so even though data centers are only 1 percent or 1.5 percent of total construction and maybe 3 to 4 percentage points of non-residential construction, for some of these large rental operators they could eventually be over-exposed to that. They could be at 8 or 9 percent of their business, which is pretty meaningful if you’ve got that exposure and it’s growing as rapidly as it is, you can see how large rental houses could be over-exposed. 

In terms of what we might expect from data centers in 2026, there’s a lot of capital commitment that has already been made and frankly there’s not enough capacity, so we know right now that we’re going to see continued growth in data centers in 2026. This is sort of a very long backlog type business. We’re forecasting another nearly 15 percent growth in the data center market in 2026 and that’s growth. In 2027 we think it’s going to be a slower pace, we think it’s going to slow down to maybe 7 percent. This is the part of our forecast that has a lot of room for change based on the capex numbers that we’re seeing from the hyper scale dealers as well as what is happening from the pure constraint on the infrastructure side.

One of the challenges that data centers have is access to electricity and that is a limiting factor. If electricity is to be available on a wide scale of consumption that we’re talking about here, you probably would see more of these built. But that is one important factor. 

That might stimulate the power generation market to provide enough generators and generation of power. 

Absolutely, which is exactly what you hear from companies like Caterpillar that have that business. That’s what you hear from Cummins, from Rolls Royce, from Siemens, that there’s definitely very strong demand for electricity generation equipment. One of the things that in some ways is a little bit puzzling is that power is a subcomponent of nonresidential construction and, interestingly enough, there has been very little growth in power in 2025. It takes a while when you’re talking about new utility construction for the maintenance and expansion of the electrical grid, it takes longer to do that than it does almost any other category of construction. I do think there’s a lag effect here in the power category in 2025, and that is something that could accelerate in 2026 and 2027. This is a big vertical, the second largest vertical in private nonresidential construction, second only to manufacturing, so if power accelerates many rental companies would benefit from that.

What kind of expectations do you have for manufacturing construction, factories, highways, commercial, strip malls and so on?

Looking forward, we expect private nonresidential construction to decline 2.6 percent in 2026, before rebounding to 4.1-percent growth in 2027. Manufacturing construction is really important. This is the largest sub-category at the moment, we have had a huge boom in the wake of COVID. I think of that as being driven by the CHIPS act, drlven by the IIJA bill, which allocated a lot of money to EV batteries, battery plants and the like. So this boom has kind of come and gone. Part of the reason why non-residential construction has struggled is this vertical, manufacturing, contracting in 2025. It’s on track to decline more than mid-single digits.

The bill that the Trump Administration passed, the One Big Beautiful Bill act, contained an important provision, for the first time that I’m aware of, somebody has the ability to fully expand the investment that they’re making in construction manufacturing plants. That is important because of the importance of cash flows, it just changes the return on investment calculation that any manufacturer would have when considering putting up a manufacturing facility in the United States. So that has managed to drive re-shoring in the U.S. What’s going to be interesting to watch is to see how effective it is. It should be effective because it positively impacts the return on that invested capital.

Now what remains to be seen is the magnitude. Is it actually going to be a trickle or can we actually see a wave of investment? And the reason we don’t know the answer yet is because it takes a while for this to manifest itself. This provision in the law became effective roughly half a year ago and to put up a manufacturing facility is a long process. But at a point in time in 2026 we’re going to start to see, at least at some point, whether or not the manufacturing sector is truly starting to invest more and re-shore. I’m optimistic that we can see that occur. And that would make a tremendous difference for the equipment rental industry and for construction as a whole.

In terms of highway construction, the current infrastructure bill, the IIJA five-year bill is set to expire at the end of the fiscal 2026 year. What’s interesting about that is that a five-year bill still has 30 percent of its original funding left to be committed. Which means that if you think about it mathematically, they should only have 20 percent of its funds left. If they have 30, I think a lot of these funds are going to get committed in 2026. That in turn will support actual spending in 2027 and even into the first half of 2028.

We remain pretty optimistic about public construction spending whether it’s bridges, highways, airports or the like. The bill is expiring in 2026. Yes, those funds will be committed but then the bill is done. So, what’s likely to happen from that? Our fear is that the most likely scenario we end with is something called continuing resolution, which are basically stopgap measures until a new bill is passed by Congress for infrastructure purposes. These continuing resolutions are designed to essentially maintain the current levels of funding in place until a new bill is passed.

So that’s the likely outcome. It’s going to be driven by the election cycle. In our opinion, it’s unlikely that we’re going to have an IIJA replacement prior to the mid-terms, we don’t think that that’s going to happen. We’ll see how the election plays out but if you look at prediction models and you look at polls, it does look like the Democrats have a high likelihood, over 70 percent likelihood, of regaining the majority in the House. And if that’s the case, you’re probably not going to see an infrastructure replacement bill until after the general election in 2028. So, the way I summarize it, the IIJA gives us a bridge through 2027, but for a new bill, we’re probably going to have to wait until the 2028 elections have passed.

Public street and highway spending (28 percent of total public spending) increased 11.5 percent in 2022 and 20.9 percent in 2023, but growth slowed to 3.2 percent in 2024.

How does residential activity look for 2026?

Residential has been my true source of disappointment in 2026. The market there is starting to get a little bit better in multi-family, and we are seeing better construction starts in multi-family, there’s been a pullback there. We think it’s going to recover some. Overall, we model a little over 2 percent growth in residential in 2026. And closer to 5 percent in 2027. You heard me mention interest rates, out of everything in construction, nothing should prove more sensitive to interest rates than residential.

We’re going to see it in multi-family and we’re going to see it in single-family homes.

I can’t really overstate the importance of residential too, because a lot of your readers are exposed to non-residential primarily, but residential will lead non-residential. If you build a subdivision of single-family homes, you’re going to need a lot of infrastructure to serve that community. You might need a fire station, you might need some stores, schools, you might need a gas station. So, a recovery in residential would certainly be welcome. We have been proven wrong before, we try to be conservative in our assumptions, we think it gets a little bit better.

What else can you say about interest rates?

The Federal Reserve has lowered interest rates. The problem is that that’s not really the interest rate that matters. A regular person buying a home or a business person trying to put up a commercial strip mall or multi-family housing or pretty much any construction project, they do not borrow on the federal funds’ rate. Their loans they are paying are really benchmarked, not always but usually, the 10-year treasury rate. And if you look at that benchmark, what you’ll see is that the 10-year rate has been very solid while the Fed has been cutting the Fed funds’ rate. This is a very short type of a lending rate. The longer end of the curve, the 10-year, the 30-year rate, those have been historically high. Even today if you look at it, it's north of 4 percent, somewhat about 4.12 percent today.

So this is a really important question, because what is going to happen with the 10-year treasury rate will carry itself into the pricing of construction loans and will carry itself into the pricing of the mortgage rate as well, the 15- and 30-year mortgage. That is the rate that matters the most, that’s why the Fed has not had much of an impact on that and it remains to be seen, especially with a new Federal Reserve chair that will come next year who the president is going to appoint, it will be interesting to see what measures the Federal Reserve will address. We have read interviews with officials with the Trump Administration, and they are very aware that high interest rates especially on the 10-year treasury present a very real challenge, for companies, and for a lot of construction equipment.

The problem of labor shortages has been a big issue in construction and rental. Do you see that continuing?

You may have noticed, we asked the question as part of our joint survey to your readers. At the margin roughly 40 percent are noting that yes there are some issues with labor availability. Especially folks operating in the Sunbelt states. They are the ones that are seeing maybe more active enforcement of immigration. We know that the construction industry is a top three industry when it comes to the presence of undocumented workers. We certainly have seen and have read that documented workers have struggled because they may have family members that have a different status than they do and that may have altered their availability to come to work. So, the labor availability issue is certainly top of mind not just for us doing forecasting, but for a lot of your readers and a lot of their customers.

There are no easy answers here. A lot of it is dictated by government policy. We don’t have any influence on that. But I think the question is can the rental industry, and the construction industry, find ways to increase productivity because that’s really the only other solution to this challenge. You have to be more productive and one of the things that has to be recognized is that the construction industry, out of all the industries operating in the U.S., is one of the least productive over the past four or five decades. Some of the lowest increases in productivity of any and all industries have been in the construction industry, and I think that deserves a lot of scrutiny.

Any other thoughts in relation to rental?

I’ll finish by saying this: The rental industry is a fantastic industry. And it’s one where customers are increasingly finding good reasons to employ equipment rental: the flexibility, the quality of the equipment, the professionalism, the maintenance of that equipment, there’s a tremendous amount of value that rental brings to the table. Independent of what happens with interest rates or near-term demand, the longer-term picture is quite bright.

But from a pure opportunity standpoint, where I see a lot of room for growth is in solutions that provide increases in productivity for contractors, for builders, for folks who are doing maintenance in industrial MRO or oil and gas. Having solutions that increase productivity and address important pain points will be able to grow regardless of the economic backdrop.

And the second thing is the tremendous growth of the specialty component of rental. A lot of our conversation is focused on the general rental part of the business, but specialty has been tremendous and we’ve seen that with Sunbelt, with United Rentals and we’ve seen it with Herc and obviously the national companies are investing a lot in that. But there’s a lot of room in specialty to grow for smaller operators as well.

It has been outpacing general rental significantly for years.

That’s right.