Online Rental Startups Are Bulldozing the Heavy Construction Market

It doesnt get more tangible than heavy construction equipment. But given the expense, risk and underutilization, the internet is making renting more economically attractive than owning.


Online startups that match owners and users are superseding traditional patterns and even inspiring manufacturers like Caterpillar and John Deere to get into renting and financing what has historically been a purchase-only market. JL

James Hagerty reports in the Wall Street Journal:

The share of U.S. construction equipment owned by rental companies last year reached 54%, up from around 40% a decade ago. There are more than three million pieces of construction and mining equipment typically idle more than three-quarters of the time.
Platinum Pipeline Inc., an installer of water and sewer lines, recently found itself in need of a third bulldozer after winning a big new job.
Rather than shopping for a new dozer, Manuel de Freitas, president of the Livermore, Calif., company, used an app on his phone to find one he could rent for two months. The rental of a Caterpillar CAT -0.80 % D6T dozer, costing about $7,500 a month, was arranged through Yard Club Inc., a San Francisco-based firm trying to build a marketplace for idle heavy equipment, much as Airbnb Inc. has become a way for people to line up short stays in spare bedrooms.
“You don’t know what the workload is going to be,” Mr. de Freitas explains, so it is better to avoid too many purchases of heavy equipment.
Mr. de Freitas’s approach reflects an increasing inclination to rent construction equipment, a trend that has created another challenge for equipment makers including Caterpillar Inc. and Komatsu Ltd. KMTUY -1.18 %
The American Rental Association estimates that the share of U.S. construction equipment owned by rental companies last year reached 54%, up from around 40% a decade ago. Ted Grace, an analyst at Susquehanna Financial Group, said he believes the rate could top 60% within the next five or 10 years.

“Younger contractors are more comfortable with renting,” he said, unlike “old-school contractors who have always owned.”
Renting heavy equipment has grown more popular partly because of uncertainty over the economic outlook, said Frank Manfredi, a Cocoa, Fla.-based industry consultant. Some construction companies also hesitate to buy new equipment because the latest federal emission-control standards have boosted prices on such equipment by between 15% and 20%, said Mr. Manfredi, citing the costs of more sophisticated filters and other gear to reduce pollution.Mr. Manfredi figures that there are more than three million pieces of construction and mining equipment in service in the U.S. and that such machines typically are idle more than three-quarters of the available working time.
The trend toward rentals has been a huge benefit for companies that specialize in them, notably United Rentals Inc. URI -6.36 % and Sunbelt Rentals, a U.S. unit of Britain’s Ashtead Group ASHTY -2.80 % PLC. Since emerging from an accounting scandal and other troubles in 2008, United, which leases mostly Komatsu and Deere & Co. DE 0.19 % equipment, has become a stock market darling.
On Thursday, however, shares of both equipment-rental companies slumped after executives at United Rentals spoke at an investor conference of some business softness this month.
Shares of United Rentals, which had been trading at nearly seven times their level of five years ago, fell 9% to $94.95 on the New York Stock Exchange. Shares of Ashtead dropped 1.2% in London, while Caterpillar fell 2% to $86.01 in New York.
United Rental’s profit last year surged 40% to $540 million, while revenue increased 15% to $5.69 billion.
The effects on Caterpillar are mixed. A higher rental rate hurts sales of new machinery. Unlike many other equipment makers, though, Caterpillar has large and well-capitalized dealers who can afford to run rental operations. Another benefit is the manufacturers can still count on replacement-parts revenue regardless of whether equipment is sold or rented.
A Caterpillar spokeswoman said the company supports customers who prefer to rent “because it may mean that contractor can bid on or complete more projects.”

 

To address the growing demand for rentals, Caterpillar has pressed its dealers to expand their rental offerings. “We’re big time in the rental business,” Mike DeWalt, a Caterpillar vice president, told analysts in a conference call in October. That means dealers have to invest more heavily in equipment available for rent, increasing their risks. “If the economy tanks,” one dealer said, “you’re sitting there with a lot of equipment.”
Now Caterpillar is testing another way of renting. The company recently invested in Yard Club by providing an unspecified amount of loans that are convertible into equity. Yard Club already had attracted $1.6 million of venture capital in late 2013. Caterpillar plans to encourage its independent dealers to make their rental equipment available through Yard Club, said Chris Gustafson, rental division manager for Caterpillar.
Yard Club charges a transaction fee for connecting renters and owners. It provides a standard rental agreement and makes sure both sides are insured. Users of the club rate one another based on their experiences, providing an incentive for fair play.
Yard Club was founded in 2013 by Colin Evran, a 31-year-old Canadian, who got the idea while working on his M.B.A. at Stanford University. He was drawn to the industry partly because his father owned a construction company in Toronto. He sees Yard Club as part of the “sharing economy” pioneered by such companies as Uber Technologies Inc. and Airbnb. So far, Yard Club operates mainly in the San Francisco Bay Area but Mr. Evran aims to start spreading to other parts of the U.S. and into Canada this year.
Mr. de Freitas of Platinum used Yard Club to rent a bulldozer from Shimmick Construction Co. of Oakland, Calif. Yard Club’s smartphone app allowed him to quickly check what types of machines were available, he said. Mr. de Freitas also sees opportunities to rent out some of his equipment when it is idle.
Dave Kohler, Shimmick’s equipment manager, said rentals through Yard Club have produced  $75,000 in revenue for Shimmick since late 2013.