Equipment rental activity started to slow toward the end of the first quarter of 2020, impacted by COVID-19 related disruptions and a slowdown in oil and gas activity, according to the 1Q Baird/RER equipment rental survey.
Qualitative commentary slanted cautiously as the impact from the coronavirus is difficult to forecast at this point. 2020 expectations for rental revenue growth and rental rates both slowed versus last quarter’s forecasts (fleet spending outlook lowest in survey history).
The rental revenue growth of 0.9 percent year over year, was below last quarter (+5.2 percent) and lowest growth in the nine-year survey history; many respondents commented on demand beginning to slow down because of COVID-19 and lower oil prices, but expressed difficulty in forecasting activity the remainder of the year because of lack of visibility into the trajectory of the coronavirus.
Revenue is expected to decline slightly in 2020, the survey shows. The previous low forward revenue projection was in the third quarter of 2016, when respondents predicted a 3.5 percent revenue increase.
“Customers concerned because a new job can’t really get started unless for critical reasons,” said one respondent.
“Initial reaction to COVID-19 hard to measure as nonresidential construction has seen little interruption, but there is going to be some economic fallout down the road,” said another. “Revenue is going to take a hit.”
Average rental rates were down 0.2 percent year over year, similar to the second quarter of 2015 through the first quarter of 2017 period. Rate pressure was originating from lower demand due to COVID-19 and plunging oil prices.
Rates expected to be slightly lower in 2020 vs. 2019. Rental rates are expected to decline 1.0 percent in 2020, the first time the survey’s forward expectations have been negative year over year.
“My answers to the survey questions were based on 10 strong weeks followed by a plunge,” said a respondent. “Q1 won’t look awful because all the equipment coming back got billed, but the pipeline is draining quickly, and the energy sector is getting killed by a decrease in both rates and activity.”
Growth in the cost of new units increased 1.4 percent, slightly above last quarter, which was the lowest cost inflation in the nine-year history of the survey. It appears that OEM price increases toward the end of 2017 and into 2018 driven by heightened raw material inflation (tariffs) have worked through the channel (and in some cases unwound).
Average fleet size (units) grew 2.8 percent year over year in 1Q20, up slightly from 4Q19 which was the slowest growth since 4Q16 and the continuation of a multi-quarter deceleration.
Respondents expect flattish fleet purchases in 2020, lowest expectation in the survey’s history. Access equipment spending expected up 0.1 percent (4Q: +1.4 percent), earthmoving equipment spending down 1.5 percent (4Q: +2.8 percent); Small Iron flattish, “Other” up 5.6 percent.
The majority of respondents expect COVID-19 to have a negative impact on rental business. 58 percent of respondents (weighted by revenue) expect COVID-19 to have a negative impact on overall rental business (vast majority of remaining respondents believe it’s too early to tell). Equal weighted, 73 percent of respondents expect a negative impact (i.e., smaller respondents more likely to expect a negative impact).
Roughly half of respondents expect COVID-19 to have a negative impact on equipment capex spending.