Equipment Rental Insider: How to survive a recession
By Josh Nickell

Equipment Rental Insider: How to survive a recession

Opportunities are there for equipment rental

The Commerce Department recently reported a second consecutive drop in the U.S. gross domestic product (GDP). While that isn’t a definitive marker of a recession, it is a key indicator. The federal reserve also has stated that it is more concerned about battling inflation than preventing a recession.

All that news aside, it actually might not be that bad. I know a doomsday article typically gets more readers, but in this case, the equipment rental industry has some nice tailwinds to propel it through a recession. First, let’s address why it might not be that bad. Then, we’ll cover some best practices in case there is a more brutal recession.

Interest rates are rising and that might be a good thing. This probably sounds strange because an industry typically contracts when interest rates go up. This is especially true for industries that use debt to finance growth and assets, like the equipment rental industry.

However, increased interest rates are more positive than negative for equipment rental companies because they also affect contractors. For most of the last decade, the fed funds rate has been historically low, translating into interest rates on buying equipment at or near 0 percent. When a contractor makes the rent vs. buy decision, the cost of new equipment is a huge factor. Not only has the price of new equipment increased significantly, but the ability to finance it for “free” has disappeared. This should increase the perceived value of rental and make contractors more likely to rent instead of purchase.

In addition, periods with looming recessions create uncertainty for contractors. If you are uncertain about how good business will be in six months or a year, would you make a long-term investment in an expensive asset or choose to wait it out and rent in the interim? You are much more likely to select the lower-risk option of renting needed equipment.

These two tailwinds should increase rental penetration and encourage more contractors to see the value of rental, which will be positive for the equipment rental industry. There still is the chance that a recession will get worse. In that case, there still are opportunities to come out ahead.

The most significant opportunity is in staffing. Historically low unemployment coupled with the long-term trend of low availability of tradespeople have left equipment rental companies 30 percent understaffed, according to a recent American Rental Association (ARA) survey. If the recession broadens to increase unemployment, that could increase your access to talent and allow you to grow your team even if demand softens. The key would be increasing staff to meet expected demand levels instead of current ones.

Not all geographies and segments are treated the same in a recession. So, if you happen to find yourself in a market or niche product class that struggles more than others, there is more you can do. You would want to slow or freeze hiring. If you need to shrink staff, start by taking advantage of natural attrition. If that isn’t enough, aim for one deep cut vs. multiple minor cuts. Layoffs are brutal for morale, but multiple layoffs are worse.

Work to raise and preserve cash, but if you have substantial cash reserves, invest in training and upskilling the staff you retain. Good times will come again. If you are prepared to leap out of the gates with a highly trained team, you have the opportunity to gain market share. Lastly, if you perceive business is going to slow, be OK with missing rentals. One of the worst things to do going into a slowdown is to be overweight on fleet. If you aren’t missing rentals, at least occasionally, you are overstocked.

It always is dangerous to say this time is different, but what is happening now is unlikely to be a repeat of 2008-2009. I see more opportunity this time, reflected in our ARA Rentalytics™ five-year industry forecast that is updated quarterly. Our most recent update in August calls for at least two more solid years of growth. We have made no downward revisions to projections for 2022 or 2023 and still expect at least two solid years of growth for the equipment rental industry.

Josh Nickell

Josh NickellJosh Nickell

Nickell, a 20-year rental industry veteran, has spent a good portion of his life in a family rental business as a third-generation owner. His experience also includes working for a national rental company, an international rental software provider and serving the industry in a consulting capacity. Through decades of experience, he has gained unique perspective and knowledge of the construction, industrial and general tool rental industry. Nickell leads program development and member engagement for the equipment segment of ARA membership.

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