This classification covers establishments primarily engaged in renting or leasing (except finance leasing) heavy construction equipment, with or without operators. Establishments primarily engaged in financial leasing are classified in SIC 6159: Miscellaneous Business Credit Institutions.
234990 (All Other Heavy Construction)
532412 (Construction, Mining and Forestry Machinery and Equipment Rental and Leasing)
The U.S. Census Bureau estimated that $3.8 billion was directly attributed to heavy construction equipment rental and leasing firms in the early 1990s. By the end of the 1990s, sales in the equipment rental industry were projected to reach nearly $20 billion dollars. The number of establishments in this industry grew from 4,390 in 1988 to 5,790 in 1995. However, in 1997, the number of establishments had fallen to 4,961 as larger companies were buying up smaller ones and consolidating their operations. In 1997, the heavy construction equipment rental and leasing industry had a total average annual payroll of nearly $1.9 billion, and employed an estimated 53,700 individuals.
The heavy construction industry remained in a slump in the early 1990s, but showed signs of an upturn by the mid 1990s. Throughout 1996, industry sales and activity experienced a slow growth at 3 percent overall. As a result, leasing and rental of heavy construction equipment registered a slight, corresponding increase. By the end of the 1990s, the demand for equipment rentals continued to be very strong. Industry analysts estimated that overall revenues had grown by about 20 percent per annum over the last ten years.
This industry is concerned only with equipment rental and leasing arrangements that qualify as "operating" leases. Operating leases are generally short-term arrangements that allow contractors to acquire equipment for a fraction of the asset's useful life. "Financing" leases, on the other hand, are longer term arrangements that allow contractors to acquire equipment over a period of steady payments.
Construction contracting companies (lessees) lease or rent heavy equipment from leasing companies (lessors) under the assumption that higher productivity and profits are derived from equipment use, rather than from ownership of the equipment. In other words, companies that lease and rent equipment believe that they can generate greater returns by investing capital in business ventures other than equipment ownership. In contrast, firms that rent or lease equipment to contractors do so under the assumption that they can garner greater returns by investing their resources in, and managing, equipment — not building with the machinery.
One advantage accorded the lessee is flexible terms. Arrangements can be adjusted to the user's unique market conditions, cash flow expectations, equipment needs, and tax situation. Leasing or renting also allows the lessee to defer the risk of losses caused by obsolescence inherent in the purchase of heavy equipment. Furthermore, leasing frees the lessee's capital for investment in other ventures that would normally be consumed by the hefty down payment and debt burden usually required by purchase agreements.
Lessors benefit from the leasing arrangement because they typically have greater expertise in the equipment market than their clients and can more efficiently manage investments in expensive equipment. In most cases, lessors can offer equipment to the lessee for a price that is highly competitive to what the lessee would have to pay if it financed a purchase. Advantages that lessors cultivate include greater bargaining power when purchasing equipment, an increased ability to liquidate used equipment, lower financing costs, and lower equipment maintenance fees. Lessors can also benefit more than many lessees from various tax laws that apply to leasing, such as depreciation allowances.
In a study conducted by the CIT Group in 1996, 62 percent of contractors who intended to lease equipment in 1997 cited "limited need" as a major reason for leasing equipment. For the fourth straight year, "cost" continued to decline as a reason for leasing equipment. However, "unexpected need" gained popularity as a frequently cited reason for leasing equipment in 1997. By the turn of the twenty-first century, there was also a growing realization by contractors that it was more economical to rent than buy, unless the equipment could be utilized more than 75 percent of the year. By leasing, they were also able to access more and different types of equipment while taking advantage of the best technology available.
Equipment and Projects. The principal types of equipment leased and rented by firms included bulldozers, cranes, and earth moving equipment. Earth moving equipment includes a wide range of machinery such as tractors, trenchers, scrapers, graders, and crawlers. Miscellaneous pieces of construction machinery such as tunneling equipment, well drills, loaders, cutters, compactors, excavators, oversized trucks, and portable mixers rounded out the industry's offerings. While some companies owned and leased many types of equipment for various heavy construction activities, other firms specialized in renting equipment for a specific line of work.
The largest manufacturer of the leasing industry's equipment in 1999 was Caterpillar Inc., which was also the largest supplier in the world. Other large manufacturers included CNH Global, Terex Corp., and John Deere. These companies, along with 700 others in the United States, accounted for most equipment sales to leasing companies, as well as 70 percent of all worldwide equipment sales.
The two basic divisions of the market for which leasing companies provided equipment were public and private. Private heavy construction activities included commercial and industrial projects that were completed with the intent of generating a profit for the owner of the project. Examples of private heavy construction projects include office buildings, manufacturing facilities, hotels and other commercial buildings, golf courses, oil wells, private electric utilities, hospitals, and private prolonged care institutions. In 1999, total U.S. expenditures for new private non-residential construction were $175.2 billion.
Public heavy construction activities for which equipment was rented or leased were completed with public dollars, and not necessarily with the intent of generating a profit. Examples of such projects include schools, highways, water works, public utility plants, dams, railroads, canals, prisons, hazardous waste site clean-ups, and landfills. Indeed, real public works construction expenditures had been on a nearly uninterrupted upward trend since hitting bottom at $78.9 billion in 1982 and 1983. At $131.3 billion, real public works spending by the turn of the century was forecast to be 66 percent above the lows of the early 1980s.
The heavy equipment rental and leasing business in America emerged as a recognizable industry during the U.S. construction boom of the 1960s. Although little of the construction equipment used during this time was rented or leased, some contractors began to realize advantages related to borrowing specialty equipment for shortterm uses. Construction markets in the United States remained relatively strong in the 1970s and early 1980s, despite cyclical downturns, and leasing activity increased as a result of regulatory changes that made leasing more appealing to some companies. For instance, investment tax credits conveyed benefits to lessors of equipment that invested in new machinery. Furthermore, depreciation allowances were modified at various times and became particularly beneficial for most heavy equipment lessors during the early and mid 1980s. These allowances permitted lessors to deduct from their tax burden larger amounts of expenses associated with equipment depreciation. Depending on the type of equipment being depreciated, some lessors were able to increase their profits by completely depreciating pieces of machinery long before their economic, or useful, life was complete.
In addition to favorable federal policies, the renting and leasing industry was helped by the construction boom of the mid 1980s. During this time, the total value of new construction soared from $332 billion during 1983 to nearly $420 billion by 1987. But while the amount of heavy equipment rented increased during this period, most companies continued to prefer to purchase their machinery; lessors thus enjoyed only a minor share of the entire equipment market. In fact, throughout the 1980s, contractors owned more than 90 percent of the equipment used for heavy construction.
The industry began to experience difficulties in the late 1980s. In 1987, the commercial construction market began plummeting into a virtual, and prolonged, depression. New commercial construction, not including maintenance and rehabilitation, fell from about $87 billion in 1985 to $67.5 billion in 1988 and $53.8 billion by 1992.
In addition to the recessed market, regulatory changes had an impact on industry profits. The Tax Reform Act of 1986 eliminated investment tax credits the industry had previously enjoyed and reduced the benefits available through deduction of depreciation expenses. It also reduced corporate tax rates and strengthened the minimum corporate tax. All of these factors combined to reduce tax advantages that assisted firms in the industry.
Heavy construction equipment lessors benefited from a recovery in construction markets that began in 1992, when the value of new construction jumped four percent over 1991 to about $373 billion. In addition, the election of President Clinton in 1992 meant that the public sector market for equipment would likely grow since Clinton had proposed increased federal spending on infrastructure of $80 billion over four years. The Clinton administration also advocated adoption of new investment tax credits that helped lessors. Furthermore, $155 billion was earmarked for construction spending under the Intermodal Surface Transportation Efficiency Act (ISTEA) during the 1990s, which served to increase demand for the rental of heavy equipment.
Although the construction market was expected to partially recover in the 1990s, regulatory constraints affecting heavy equipment lessors showed signs of increasing. Some state and local governing bodies that were seeking ways to increase revenues were mulling over tax rule changes that would increase taxes on leasing and rental transactions. For instance, Florida tried, but failed, to institute a proposal that would have allowed the state to collect sales tax up front on leases, rather than on a periodic basis as rental payments came in. Multistate Tax Commission (MTC) proposals, which attempted to shift the source of leasing income in multi-state transactions, were also an important issue facing the industry in the mid 1990s. In 1996, an industry survey conducted by the CIT Group reported that firms in this industry cited governmental regulation as the single most serious problem facing the industry.
While the industry generally improved in the mid 1990s, firms continued to face stiff competition as a result of lackluster demand compared to the mid 1980s. Firms like Hertz, Prime, and Home Depot aggressively entered this industry. A capital crunch made it difficult for lessors in the industry to secure financing to buy new equipment or expand into different market segments. Furthermore, lessors were not able to rely on expanding international markets to boost sales as other segments of the construction and equipment industries. In fact, only a negligible amount of international trade occurred in the industry in the early 1990s. This was a result of the obvious impracticality of transporting heavy machinery long distances for short-term applications. In fact, most firms in the industry were characteristically localized. At the time (1996), Fred Anderson of the American Rental Association posited that "while major players like Prime and Hertz have equipment rental divisions, the predominant number of players are still locally-based independents."
Other factors that determined the health of the industry in the 1990s included: interest rates, which reached lows in the mid 1990s and were remained relatively friendly to borrowers on into the new millennium; high commercial vacancy rates, which kept the lid on new office and retail development; and demographic factors that impacted school and hospital construction spending.
According to Robert J. Merritt, President and CEO of the CIT Group, "In 1996, the construction industry expanded by nearly 3 percent in inflation-adjusted dollars." Another bright spot in this industry was the 6 percent growth rate for commercial construction activities during that same year. By the end of the 1990s, the $619 billion construction industry was growing at an annual rate of about 4 percent.
In 1999, a Buyers' Intentions study conducted by the Associated Construction Publications asked contractors if they rented or leased equipment. The responses showed that on a national level, 46 percent rented or leased equipment; only 6 percent said they exclusively leased. It was evident that the rental market was growing at a brisk rate, while leasing seemed to be on the decline. Contractors indicated that they were only interested in buying equipment that they would use on a regular basis, such as trucks and backhoe loaders then filling-in with rental units when they had jobs that required more equipment. Crawler dozers and cranes topped the list of popular equipment rentals.
In 1997, Beco Construction Power Co. was the largest competitor in the industry with sales of about $41 million. Morrow Equipment Company, of Oregon, was the second largest firm in the industry, realizing sales of $38 million. Rounding out the top ten companies in 1997 were Rental Tools and Equipment Co., S and R Equipment Company Inc., McLean Rentals Inc., Ferdon Equipment Co., Brown Rental Equipment Company Inc., Strawn Merchandise Inc., United Crane and Shovel Service, and Bat Rental Inc.
By the end of the 1990s, however, the industry had changed. It was a large, fragmented market that was undergoing a major consolidation process—there were more than 20,000 small and medium-sized equipment rental equipment companies doing business in North America. United Rentals had become the number one equipment rental company by merging with U.S. Rentals and buying dozens of smaller rental firms. With more than 600 locations in Canada, Mexico and the United States, 1998 sales totaled $1.2 billion and they employed 8,501 workers. Hertz Equipment Rental Corporation (HERC), a division of Hertz, emerged as the number two company with sales of $631.3 million. Rental Service Corporation, who had been bought by Atlas Copco in 1999, had more than 280 locations and recorded sales of $578 million. Other leading companies were Neff Corp. with sales of $324 million and Nations Rent, Inc. with sales of $236 million.
Positions in the heavy construction equipment renting and leasing industry entailed a variety of jobs in the mid 1990s. The greatest number of jobs was clerical, representing about 18 percent of the work force. Equipment operators and mechanics accounted for about 14 percent and 8 percent of all employees, respectively. Management and executive jobs accounted for 12 percent of industry employment. Other positions included work supervisors, bookkeepers and accountants, and sales people. Although the industry was expected to grow at an average rate in comparison to other sectors of the U.S. economy throughout the 1990s, above average growth was likely to take place in some occupations.
Forecasting to the year 2005, the U.S. Bureau of Labor Statistics identified the highest growth jobs in the miscellaneous equipment rental industry as counter or rental clerks. In the early 1990s, almost 10 percent of the workforce in this industry were counter or rental clerks.
As the construction industry became increasingly competitive in the late 1980s and 1990s, contractors were seeking advanced technology that would give them an edge in completing jobs faster and easier. Continuous technological advances in construction equipment were shortening the practical life span of some types of machinery, quickly rendering earlier models of equipment obsolete. As a result, in order to avoid ownership risks associated with obsolescence, the incentive to rent heavy machinery increased in the 1990s. By the turn of the twenty-first century, some of the larger companies were also planning for e-commerce in order to reduce costs and improve customer service. Catalogs were available on CD-ROM, customers had online access for electronic payments and many companies paid their suppliers electronically.
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