Since the collapse of the U.S. economy in 2008 and 2009, many have watched and waited for the strong rebound to bring nonresidential construction roaring back to life. While the economic engine may not have been firing on all cylinders these last five or six years, there has been enough positive momentum to sustain a slow and steady path to the new normal. 

One of the most important hallmarks of this recovery cycle has been the unprecedented rise in heavy construction equipment rental. Contractors cite one primary cause: unpredictable work backlogs. Uncertain business activity decreases contractors’ confidence in their ability to produce the cash flow to support long-term asset acquisition. 

To some degree, out of necessity and partly out of uncertainty, the contractors that survived have turned to equipment rental to meet their project needs. In essence, they have become more sophisticated in their fleet management: buying equipment when needed but knowing that the nation’s equipment distributors and rental companies have a sizable fleet to tap into on demand. 
Rental fleet sizes have increased significantly since 2010. In just the last year, the large general rental companies have increased their fleets on an original equipment cost basis by more than 12 percent. OEM dealers and independents have increased rental fleets by almost 18 percent. 

In the 2015 Wells Fargo Equipment Finance Construction Industry Forecast, contractors and distributors said they expected to rent more, once again, because of uncertainty in the marketplace. Rental rates have risen with the demand, increasing almost 26 percent since January 2011. During the last year, rental rates and utilization rates have dipped slightly, mostly because of weakness in the energy sector, but the overall rental trend remains intact. 

The 2016 Construction Industry Forecast by Wells Fargo Equipment Finance reveals cautious optimism among contractors and dealers that nonresidential activity will increase compared to 2015. This means the balance of activity is shifting away from the energy sector to more traditional residential and nonresidential construction. This has helped absorb much of the equipment coming out of the oil and gas sector. 

In the near term, several factors are influencing contractors’ and equipment distributors’ levels of confidence for the year ahead. 
  • Federal highway funding. Late in 2015, President Obama signed the first long-term federal highway funding bill passed in almost a decade. Although it was unlikely that Washington, D.C., would allow highway funding to lapse, the long series of short-term patches did little to instill confidence. After long debates about how the fund might find more sustainable sources of revenue, a five-year bill made its way through the House and Senate to the president’s desk. The initial response has been positive, yet muted.
  • Bonus depreciation. At the end of 2015, a federal omnibus spending bill reinstated the “elevated” depreciation expense levels for another year and extended those benefits going forward. This spurred some equipment acquisition prior to year-end, but more importantly set an expectation for tax benefits that will apply for the foreseeable future. 
  • Rising interest rates. The Federal Open Market Committee raised baseline interest rates one quarter point at the end of December. In the short term, this may not spur more equipment acquisition, but if interest rates continue to rise, more contractors may commit to equipment purchases to lock in predictable equipment costs. Distributors and rental houses have benefitted by having low interest rates to support acquisition of rental fleets. Rising rates over an extended period could put a pinch on that and curtail the supply of equipment for rent. 
  • Tier IV equipment. This new generation of equipment is here to stay. Some contractors have expressed concern about the increased cost and about the reliability of the equipment, so the rise in rental demand may continue until more contractors feel at ease with the overall cost of ownership of Tier IV machines, or until rental rates climb high enough. 
Construction equipment buying patterns and attitudes about equipment rental and ownership continue to evolve. During the last five years, contractors have become more comfortable and savvy with the short-term use model where they rent more equipment for the duration of a project or for a period of time for which they can reasonably foresee using it. Although legislative and economic factors are pointing toward a period of greater stability and nonresidential activity, both equipment providers and equipment users are more accustomed to a landscape where equipment rental is a stronger part of the equipment use mix. 
Equipment acquisition remains strong, but the degree to which equipment end users are actual owners or just renters is more fluid than in the past. 


John Crum is national sales manager for Wells Fargo Equipment Finance’s construction group. For more information, visit wellsfargo.com/com/financing/equipment-financing/construction