Can We Borrow This

February 28, 2007
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A decade ago, contractors rented only about 5 percent of their construction equipment, but today equipment rental is more and more becoming an industry standard.

According to the American Rental Association, contractors are finding it more cost effective to rent heavy construction equipment rather than purchase it. The association said that in 2006, the demand for construction rental equipment reached 35 percent, and it’s expected to rise to 50 percent by 2010. The rental industry is projected to generate $29 billion in revenue this year.

Industry experts have seen a shift from a “buy” mentality toward a greater reliance on rented equipment. The Associated Construction Publications’ 2007 Buyers’ Intentions Study reveals that contractors rent more equipment and own less than in previous years. Four years ago, respondents reported renting 11 percent of their construction equipment, leasing 8 percent and owning 81 percent. Last year, however, companies said they rented 22.2 percent of their equipment fleet, leased 8.4 percent and owned 69.5 percent of it.

Construction equipment rentals tend to be driven by such factors as interest rates, construction spending, housing, non-residential construction and oil prices.

Paul Roussey and Ryan VanNest established Titan Equipment in Grand Rapids two years ago. The company rents as well as sells a broad range of scissorlifts, boomlifts and rough-terrain forklifts to contractors and industrial plants in Michigan’s Lower Peninsula, and also provides parts and service for customers’ equipment. Last fall Titan expanded, opening a second location in Lansing.

Roussey said he and VanNest have seen consistent growth in the rental business over the combined 24 years they’ve worked in the industry. It seems, he said, that as more and more contractors realize the benefits of renting equipment, they would just as soon conserve the capital outlay for a piece of equipment and rent it for three or four months instead. Short-term construction equipment rentals constitute 80 percent of Titan’s revenue, Roussey said.

“There are just more and more people out there who are renting and finding applications for our equipment,” he observed.

Generally speaking, when a contractor knows he’ll need a piece of equipment for, say, at least a year or so for a particular project, he’ll go ahead and buy it so he has something to show for his money when the year is up, Roussey explained.

Whether to buy or rent really varies depending on the philosophy of the contractor, he said. There are some customers who absolutely refuse to own equipment, because they don’t want to have to hire mechanics to maintain it, they don’t want to store it, they don’t have the wherewithal to move it from job site to job site, and they don’t want the liability and everything else that goes with ownership.

Roussey said one of the reasons Titan has grown so much is that it’s a locally owned business and not a national conglomerate.

“If you can offer a good level of service and competitive pricing, I think people in West Michigan would just as soon work with a local company rather than sending their money to another state.”

North Carolina-based Volvo Construction Equipment Rents Inc., which provides short-term rentals of small to medium-sized construction equipment, is looking to enter the West Michigan market and establish two to three locations this year.

Nick Mavrick, vice president of global strategy and marketing for Volvo Rents, said the construction equipment rental industry is one of the fastest growing in the country. Contractors, both residential and non-residential, represent about 62 percent of Volvo Rents’ customer base. Two-thirds of its client base are entrepreneurs who own their own companies and have 25 to 99 employees, Mavrick noted.

“We’re like a supermarket of equipment,” Mavrick said. “It’s like if you went to the grocery store and they had the bread and the eggs but not the orange juice, you might go to the next store that had it all. Contractors rent from us the whole basket of goods based on the lifecycle of their project.”

Mavrick believes that as construction spending starts to drop, contractors will be less likely to make big equipment purchases, so the market will be ripe for rental equipment. When the business climate shifts and contractors are uncertain what will happen to the economy, they tend to buy less equipment and rent much more, he said.

Volvo Rents keeps an eye on long-term growth rates in the nation’s 318 metropolitan statistical areas, and Grand Rapids ranks as No. 47. Furthermore, Mavrick said, McGraw-Hill forecasts that more than $850 million will be spent on construction in Grand Rapids in 2008, and that appeals to Volvo Rents, too.

CIT Construction’s 31st annual construction forecast predicts contractors will meet 14 percent of their needs this year through equipment rental and leasing. Ten percent of contractors said they expect to rent more equipment this year than last, while 86 percent said their rental requirements probably won’t change much. Some 68 percent of contractors said they rent rather than buy when they have a limited need for a specific type of equipment. About one-fifth of contractors said cost savings are a primary motivation for renting rather than buying.

“Generally, if someone doesn’t utilize a piece of equipment more than 75 percent of the time, they’re better off renting than owning, and contractors are doing the math more and more,” Mavrick said. “The reason is that with the purchase of equipment, you’ve got financing costs, taxes, insurance, maintenance and transportation costs. It all adds up.”

Volvo Rents’ parent company, the Volvo Group, is a $32 billion industrial manufacturer of construction equipment, trucks, buses and aircraft engines. Volvo Construction Equipment is the fourth largest manufacturer of construction equipment in the world, Mavrick said.

“To capitalize on this fundamental shift from owning construction equipment to renting, we decided to proactively enter the rental business through franchising,” Mavrick explained. “People who qualify for franchises have access to about $5 million in financing per store.”

Mavrick is seeking a few qualified applicants to start Volvo Rents franchises in West Michigan. Franchisees generally need a liquid net worth of about $750,000 and should have equipment rental experience represented in their management group, he said. The company’s subsidiary, Volvo Commercial Finance, provides financial packages to qualified franchisees. Volvo uses all its resources to help people set up franchises because the equipment rental business is so strategic to the company, Mavrick said. He said Volvo Rents is probably the only franchise company in the nation that can say it has hundreds of millions of dollars invested in its franchisees. 

The company operates more than 70 locations in North America. Because its franchises are locally owned, managers have decision-making power and greater flexibility in working with individual customers, Maverick said. It also has rental centers in Italy, Germany, Portugal and Spain.     CQX

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