Equipment rental and leasing industry in the US

• The benefits of renting equipment
• Why the present demand is led by construction and industrial segment?
• Developed and developing economies leading to fast paced growth

The equipment rental and leasing concept was primarily introduced in the market after the World War II (post 1945), when capital to acquire equipment was scarce and there was a huge need for rebuilding and rehabilitation. The equipment rental eliminated the need for a high capital investment in form of owning assets as well as the holding equipment for long term, thus resulting in capital and cost efficiency.

In the past two decades there has been rapid technological advancements. This boosted the equipment rental industry dramatically as companies got access to the latest technology and equipment, which reduced the need for huge capital investment to upgrade existing equipment. In addition, the benefits associated with rental such as improved utilization rate of equipment during a project, no disposal or maintenance costs, no storage requirement, enhanced cost control and easy equipment tracking was realized by the companies. All these factors led to a solid growth for the equipment rental and leasing industry globally.

Presently, the demand for equipment renting and leasing is primarily driven by the construction and industrial segment (contributed over 70% in the overall equipment rental revenues in 2016). The global infrastructure development fueled construction spending internationally. The developed economies like the United States are focusing on the infrastructure reconstruction projects, while the emerging economies are concentrating on building new infrastructure. This is leading to fast paced growth in the construction segment.

The United States equipment rental and leasing industry grew steadily in past decades (barring slight decline during 2008 global economic downturn) and spearheaded the global growth, which reached $47.2 billion (2016), growing at a CAGR of 5.4% (1998-2016). 

The demand from the non-residential construction exceeded the residential construction segment in the United States. This sector employs heavy equipment that entail high capital cost and is primarily used in large projects. Hence, the contractors prefer renting equipment as it is a more profitable proposition than owning equipment. This is largely due to the uncertainty of a project, which results in lack of confidence for generation of free cash flow to invest in acquiring equipment.

The above assertions are further strengthened by the Equipment Rental Penetration Index (rented equipment value as a percentage of total) that show a healthy upward trend over the years, indicating the increasing use of rental vis-à-vis owned equipment in the United States. Although, the equipment rental penetration witnessed a slightly sluggish performance in past two years.

The weakness in oil and gas market caused the above slowdown in the rental penetration. The ongoing drag in the oil and gas industry impacted the rental revenue from oil and gas equipment and somewhat challenged the growth in the equipment rental industry.

However, the equipment rental and leasing industry in the United States comprises more than 30,000 regional and national players (source: IBISWorld), this leads to over-fleeting in the sector. The revenue in the industry is highly concentrated with more than 55% of this being accounted for by the top 50 players. Additionally, large players enjoy economies of scale in terms of buying of equipment and possess multiple outlets to rent and command the majority of the market share. The small players compete in local markets by providing specialty products and by offering superior customer services.

The profitability of equipment rental companies largely depends on the cost of financing rental inventory and merchandising inventory mix. Thus, these players implemented multiple strategies such as equipment sharing among different branches of a firm in a region, availability of multiple equipment at all branches and hence, enhancing merchandising inventory blend. Further, in order to improve customer engagements, these players introduced one-stop solution for customers, for instance, services like skilled labour, repair and maintenance, along with renting equipment.

The average rental yield [rental revenue as percentage of total fleet (or equipment) cost] witnessed a decline during the past 2 to 3 years. This was due to the continued pressure from the oil and gas sector and the impact of the recent fleet expansion in the industry. The same was reflected in the margins of the players which remained range bound or declined marginally.

*Average value has been derived for 4 large Equipment rental operators in the United States (>14% market share) namely United Rentals Inc., H&E Equipment Services Inc., McGrath Rent Corp. and Neff Corporation.

Likewise, the industry saw consolidation to achieve economies of scale in the past few years. The mergers and acquisitions helped these players to grow inorganically and diversify their product offerings as well as provide a one-stop solution for clients across numerous industries.

Televisory believe that the US equipment rental and leasing industry will sustain its growth in the near future on the back of the infrastructure push from the Trump administration’s proposed $1 trillion for infrastructure development projects.

According to the American Rental Association, the industry is projected to grow at a CAGR of 6.4% (2016-19) and will reach $56.8 billion in 2019.

A fully-integrated solution offered by the rental firms will result in a continuous growth of the rental penetration and with further consolidation in the market, this would offer a strong set of drivers to support the sector’s future growth potential. Thus, with the consolidation in the industry, the over-fleeing will remain in check as future duplication of fleets across various players would reduce. Televisory expect the operating margins to  increase with improvements in the rental yields going forward, resulting from economies of scale, reduced over fleeting and huge demand from the infrastructure construction segment. Therefore, the major operators in the industry need to deploy distinct strategies to sustain their position and capitalize on the growth in the industry.