Photo courtesy of United Rentals.

Rent or Buy?

Across North America, Companies are Increasing Rental and Purchase of Equipment 

It’s an ages-old question in the construction business: should we rent equipment or should we buy it? As the market has fluctuated through the years, so has the balance of rented vs. purchased equipment. In the last decade, there has been an emphasis in North America on owning equipment, with companies investing significantly to boost their fleets. But in the two years following 2001, equipment sales declined and rentals flattened along with the economy.

Today, as the economy starts its slow recovery, construction firms once again are making equipment investments on both the rental and purchase sides. But industry experts see a shift in the balance away from a purchase-focused mentality toward greater reliance on rented equipment. From small hand tools to the largest earthmovers, and from small specialty contractors to the largest builders, the numbers are up all over the map and the equipment market is booming.

As the construction market strengthens, contractors are finding an increased need for cranes and other heavy-duty equipment and are often choosing to rent. Photo courtesy of Essex Crane Rental Corp.

To Rent: Cost Control,
Competition and Flexibility Drive the Market

The days of acquisition are mellowing, according to Mike Abbruzzese, senior director of information services for the American Rental Association. Six or seven years ago, the percentage of construction equipment being rented was between 10 and 15%, he says. Today, that number is closer to 30 or 35%, says Abbruzzese. “Over the next three to five years, we could see that go up to 40 to 45%,” he adds.

Abbruzzese attributes some of the increase in equipment rentals to an overall strengthening of the U.S. economy and of the construction market, but says that other factors are at play too: “Prior to the days of consolidation, there were regional players in the rental market, and mostly the rental outfits were independent, dealing on a local or regional level,” he explains. “Now, we’re dealing with national companies who are developing relationships with large contractors working throughout the country,” Abbruzzese continues.

Companies like Caterpillar, Inc. are seeing increased equipment sales buoyed by a slowly recovering economy and replenishment of aging fleets. Photos courtesy of Caterpillar, Inc.

Those relationships mean more market penetration, an increased comfort level and higher quantity of rentals; they also require the existing regional players to become more competitive to hold on to customers. The successful smaller rental firms “turn into solution providers, highlighting the benefits of renting over owning: using capital not to buy machines that become obsolete, but for performing core activities,” says Abbruzzese. With rental equipment, there are no maintenance costs, less need for maintenance personnel, reduced warehouse and storage costs, and no need to worry about disposal of old equipment. Contractors also gain more cost control on projects because if rented equipment breaks, the rental company replaces it.

“More than anything else, there’s more of an awareness that rental is really an option,” says Abbruzzese. “You can go out and get the best equipment and you don’t have to buy it.”

Specialty rental companies like Red-D-Arc carve out a niche to stay strong. Photo courtesy of Parsons E&C

To Buy: Aging Fleet Replacement,
Economic Strengthening Boost Sales

The rental market may be growing stronger, but equipment sales aren’t being left behind, according to the Association of Equipment Manufacturers’ (AEM) 2003-2004 Outlook for Construction Equipment Business. Machinery manufacturers expect to see growth in 2004 U.S. sales of about 5.5%, and a record 3.7% increase in Canada. The survey was conducted in fall 2003 and expectations now are for additional growth.

Equipment manufacturers are more optimistic than ever. AEM points to a general improvement in business conditions and to the fact that many fleets are aging and need replacement. Manufacturers and the rest of the construction industry are still waiting for passage of federal transportation spending legislation that should also impact equipment sales positively. Public works construction is seen as an important revenue source for the equipment sales industry.

AEM’s Outlook also measured several factors that manufacturers believe will impact market growth. Not surprisingly, the impact of interest rate levels and credit availability on overall job costs ranked high, as did financing for housing and commercial building starts, dealer inventories and fleet replacement.

In recent years, smaller rental operations have had to become solution providers and customer service experts to compete with bigger national companies. Photo courtesy of American Rental Association

Rental markets also account for an increasing share of equipment sales, according to AEM. Respondents to the association’s Outlook survey say that capital spending by rental firms to replace aging fleets is another factor that will positively affect future machinery business.

Outlook: Balanced
It’s clear that in anticipation of continued economic gains, companies are investing in equipment, whether renting or buying. Just how quickly the market will grow remains to be seen, as consumer confidence and spending levels continue to fluctuate. But there’s no doubt: the equipment market is on track for continued growth through the end of 2004.

Thomas Jaschik, Group Senior Vice President, LaSalle National Leasing Corporation

LaSalle National Leasing Corporation provides middle- to large-ticket equipment financing for commercial and municipal entities in North America.

What factors are contributing to an increase in financing?

Since the beginning of the second quarter, demand has been very strong; we’re up about 30% from last year. The economy is starting to pick up steam: last year, we had many clients who were financing their maintenance. Now we’re seeing more clients who want to expand their capabilities. Another contributing factor is the expiry of bonus depreciation at the end of this year, which is spurring the purchase of equipment before the end of 2004.

Do you expect this trend to continue?

Yes. The summer is usually a down time, but we’ve been busy throughout the summer, which we think is a good indicator of things to come through the end of the year.

What are some advantages of long-term financing through LaSalle?

Long-term financing is an excellent alternate form of capital for clients who prefer to use their bank lines for other corporate matters. With a regular bank loan, the institution might finance only 70 to 80% of total equipment cost, but in leasing, 100% of the equipment is financed—including other soft costs like freight and taxes.

LaSalle National Leasing Corporation offers clients a major advantage in custom structures. We’re in the middle- to large-ticket market, so developing the right financing approach is very important to these companies. We structure the transaction to fit the accounting treatment they want to achieve, achieve the most tax benefits and create the optimum payment stream for their needs.

Anthony Gonnella, Division Vice President, Sales for Hertz Equipment Rental Corporation

The Hertz Equipment Rental Corporation fleet is one of the strongest in the nation, with a product line that ranges from small hand-held tools to large earthmovers. The company has a network of 259 locations in the U.S. and Canada, offering a variety of rental and purchase options.

What is demand like right now for rental equipment?
Has it increased or decreased recently?

As compared with last year, demand has improved and has shown a steady month-to-month increase since January. Since March, equipment "on-rent" utilization has increased and all indications forecast positive results going forward.

What market factors are driving demand today?

Modest improvement in the economy has pushed traditional markets to drive demand along with flexibility of equipment usage in terms of renting versus buying. In addition to our core markets, Hertz Equipment Rental has diversified its offerings, and we are targeting the general rental (retail tools and supplies) market and focusing on the industrial sector.

What advantages do your customers experience by renting equipment?

Procurement of owned equipment requires the outlay of capital and employment of staff such as mechanics, parts and maintenance supplies, and management. If owned equipment fails, a customer not only suffers direct costs such as renting a temporary replacement and lost production, but also indirect costs such as parts, labor and depreciation.

At Hertz, we employ experienced personnel and offer a wide range of equipment and services from heavy construction/industrial equipment to tools, pumps, generators and on-site services. By renting equipment, Hertz customers are operating a younger, well-maintained fleet with up-to-date safety and operational features.

Wayland Hicks, Chief Executive Officer, United Rentals, Inc.

The United Rentals, Inc. is North America’s largest equipment rental company, offering everything from heavy machinery to power tools. The company is also one of the largest resellers of used equipment.

What is demand like right now for rental equipment? Has it increased or decreased recently?

In recent months we’ve seen some slight but definite signs that demand is growing for rental equipment in the private nonresidential construction market, which accounts for about 75% of our customer base. Out on the jobsites we’re getting a sense of cautious optimism from many of our customers and that can be as good a leading indicator as any statistic.

What market factors are driving demand today?

Clearly a steadily improving economy should help drive demand for rental equipment in all areas of construction. Beyond the economy, each type of construction in North America is subject to its own pressures, good and bad—for example, nonresidential building starts jumped 11% in May, but the industry has serious concerns about the rising prices of steel, lumber and cement. This could hamper nonresidential construction even in an improving economy.

What advantages do your customers experience by renting equipment?

It’s more cost effective to rent for any application where the equipment, if purchased, would sit idle three out of twelve months a year. This takes into account all the hidden costs of owning the equipment, including storage, maintenance, parts, repair, transport, insurance, depreciation and commitment of capital. Renting shifts these responsibilities from the end user to the rental business. In addition, rental companies must continually invest in new equipment technologies to stay competitive, and customers benefit as a result.

Freek Nijdam, Chairman and CEO, Rental Service Corp.

Rental Service Corp. fulfills the rental and sales demands of the construction, industrial/petrochemical, manufacturing, government and homeowner markets in the United States, Canada and Mexico.

What advantages do Rental Service Corp. customers experience by renting equipment?

Rental Service provides customers with the flexibility to utilize the right equipment only when they need it. Rental Service maintains a large fleet of equipment sizes and types to meet each customer’s needs without the hassle of ownership. By renting, customers can change many of their costs from fixed to variable, allowing better control over their total equipment expenses. Renting equipment frees time to focus on the customer’s core business, while at the same time reducing overhead and infrastructure.

How does Rental Service keep its competitive edge?

Rental Service has several programs to stay ahead of the competition and we continue to develop new programs.

Rental Service provides 24/7 customer service and online customer tools that make renting easier. Our in-house customer care center is staffed with Rental Service employees who have access to all customer account requirements and history, 24 hours a day, 7 days a week.

Our exclusive online tools make renting easier by using Web-based management tools that provide real-time, secure and private access to account activity. eFacts™ allows users to create standard or customized reports by equipment job or purchase order and also allows customers to call equipment off rent. Our Online Rental program gives customers the ability to choose equipment from thousands of available categories and manage the rental process from their own computers. Our Total Control™ software integrates with the company’s computer systems and helps customers manage their entire rental process in real-time.

Craig Paylor, Senior Vice President of Sales, Marketing and Customer Support, JLG Industries Inc.

JLG Industries is the worldwide market leader in sales of aerial work platforms. Recent acquisition of the SkyTrak and Lull product lines also solidifies the company as the North American leader—and one of the top three companies worldwide—in telescopic material handlers.

How is the current demand for your equipment?

Demand is up very high compared to last year’s levels. Like many other construction equipment manufacturing companies, we are having a strong year and we’re continuing to drive a strong backlog. Including the recent acquisitions, JLG has seen significant growth and we continue to focus our energies globally. By 2009, we expect to be a $2 billion company, roughly double our current size.

What market factors are driving demand today?

Housing has been a very strong segment during the past few years, and any time you get a lot of housing starts, a great deal of supplementary infrastructure business in the form of strip malls, schools, hospitals and roads, for example, is created. Our equipment also is used frequently to construct both single- and multi-family dwellings, as well as non-residential construction.

How does JLG keep a competitive edge in the marketplace?

The kinds of equipment we manufacture have always been popular in the rental market among contractors. Today, more equipment is being rented than ever before, but there’s still a real market for purchasing equipment as well. Whether a customer is renting or purchasing our equipment, JLG’s competitive edge has always been the superior performance of our equipment and our after-sales service and support. In addition, we invest a great deal in product development and our products hold their value very well, which lowers our customers’ overall cost of ownership.

Chris Gustafson, Eastern and Canadian Region Rental Manager, Caterpillar, Inc

For more then 75 years, Caterpillar, Inc. has been building the world’s infrastructure and, in partnership with its worldwide dealer network, is driving positive and sustainable change on every continent. Caterpillar is a technology leader and the world’s largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines.

What advantages do your customers experience by purchasing CAT equipment?

The Caterpillar dealer network is uniquely positioned to offer customers an unmatched range of services and products ranging from purchase to rental, from new to used, from Cat equipment to Allied equipment, from parts and service to a wide array of financing options. The Caterpillar dealer network provides tailored solutions to customer needs.

How does Caterpillar keep its competitive edge?

People; by supporting and empowering people to improve Caterpillar every day. Caterpillar people are passionate about their company and understand how the work they do adds value to Caterpillar.

Ronald Schad, President-CEO, Essex Crane Rental Corp

Essex Crane Rental Corp. is the world’s largest provider of Manitowoc lattice-boom crawler cranes and attachments. With more than 480 cranes and attachments in its fleet, the company supplies equipment for projects in many facets of the construction industry.

What is demand like right now for equipment?

Demand is up. The impact of the events of 9/11 and the disruption of the energy markets by Enron caused a decrease in heavy construction since 2001. During the past six months we have seen what appears to be the beginning of a recovery in heavy construction, which supports the increased demand for large cranes that we are experiencing.

Are more people renting or buying cranes?

There continues to be a steady shift amongst construction contractors from owning to renting large lattice-boom cranes. We believe this is driven by the difficulty of predicting demand for large cranes by size and location. The skill sets required to service, repair and relocate large cranes are not considered a core competency by most contractors. Finally, the huge capital investment required to make available the most efficient crane in close proximity to the job locations prohibits ownership of large cranes for many contractors.

How do you keep a competitive edge?

Essex stays focused on large lattice-boom cranes, without the distraction of smaller telescopic cranes, boom trucks or aerial platforms. This allows us to offer a higher level of expertise in providing this type of equipment, which leads to higher quality at a lower cost to the contractor. Essex keeps its competitive edge by investing heavily in new cranes and spare parts, highly trained service personnel, service trucks and tools and equipment management systems.

Steven Darroch, Senior Vice President and Chief Financial Officer, Red-D-Arc Welderentals

Red-D-Arc Welderentals, with 40 locations in the U.S., Canada and Mexico, operates the welding-equipment rental division of Airgas, Inc., the largest U.S. distributor of industrial, medical and specialty gases, welding, safety and related products.

What is demand like right now for your equipment?

Demand for rental equipment is strong. Even in the recent economic downturn, we’ve continued to grow our business. There’s a fundamental shift taking place within both construction and industrial companies; customers are looking to rent more equipment. Our clients have concluded that they have competing investment choices, and they must put their cash in the highest-yield areas possible.

What market factors are driving demand today?

While new construction remains soft, maintenance work in a variety of industries including power, automotive, petrochemical and pulp and paper are ongoing. We’re also seeing some growth in shipbuilding and the oil production industry in general. There are some encouraging signs that continue to point to a broader-based economic recovery.

What advantages do your customers experience by renting instead of purchasing welding equipment? And how do you keep your competitive edge?

In the U.S., there has been a tendency to own assets despite utilization and other cost considerations. But today, our clients are seeking return-on-investment over asset ownership. That’s where Red-D-Arc gains a significant competitive edge: specialization. Our clients may require up to 500 welding arcs or more and we’ve got the largest welding and positioning fleet in North America, with more than 30,000 units to complete any job.

Kyle Lewis, Owner, Lewis Equipment Company, LP

Lewis Equipment is the second largest tower crane and personnel/material hoist rental company in the U.S. Sister company Rock Island Rigging, LP is the largest rigger of tower cranes and hoists in the U.S. Rock Island works around the country, utilizing Lewis Equipment’s roof-top derricks to provide complete rigging services to customers.

What is demand like right now for rental equipment?

The market has increased markedly in the past six months. Everyone in the tower crane business is sharing very high utilization, although prices have not rebounded to the levels that we would expect. The current tax incentives and the tight rental marketplace are both giving customers more reason to consider purchasing.

What market factors are driving demand today?

All of the rental companies are very busy and the interest rate continues to be a driving force in construction. We see a continued high demand for larger cranes, with a normal level of activity in smaller cranes and hoists. We are also experiencing an increase in requirements for specialized rigging work.

What advantages do your customers experience by renting/purchasing equipment?

Purchasing equipment is normally driven by three factors. First is the duration of the project. Second is the cost of borrowing money. Third is the residual value of the equipment at the end of the project.

How does Lewis Equipment keep its competitive edge?

You start by employing the best people in the industry. You pay them well and demand excellence. Maintain a top-notch fleet of equipment and round it off with turnkey customer service.