Wells Fargo Equipment Finance (WFEF) recently released its 2016 Construction Industry Forecast. This year’s forecast – the fortieth of its kind conducted by WFEF and its predecessors – gathers insight from construction industry executives with regard to current business conditions and trends. In the following interview, Equipment Finance Advisor takes the occasion to speak with John Crum, SVP and National Sales Manager in the Construction Group who discusses some of the salient findings in this year’s survey. Crum also provides some background that serves to shed greater light on the participants’ responses. Of course, we urge our readers to view this comprehensive survey, which can be accessed here. Wells Fargo 2016 Construction Industry Forecast.

In his forward to the survey, Crum notes that the Forecast’s Optimism Quotient (OQ) dropped from its all-time high of 130 in 2015 to 108 in 2016. And while this decline is noticeable, Crum explains the OQ still indicates that these contractors and distributors remain optimistic about the opportunities available in the construction sector this year.

Equipment Finance Advisor:  The Highway Funding Bill was passed at the end of last year. Please comment on the impact that the Bill’s passage will have on contractors and distributors?

John Crum:  I think that there are a couple of things to note here. When we asked participants the following question: “What regulatory issues are of greatest interest to you as it relates to your company,” 37% of the participants indicated the passage of the Bill was of the greatest importance to them. This edged out Tax Incentives such as Bonus Depreciation Section 179D.

We also have anecdotal information from our contractor customers that the Bill’s passage took away a degree of uncertainty. While no one thought Highway Funding was going away, the finality provides people with a reasonable expectation that there will be work out there and they can start to plan accordingly. In short, as we talk to both contractors and distributors, they are glad to have this issue put to rest so they can start to concentrate of other parts of their businesses. I think this will drive equipment sales.

The Bill’s passage really helped at the state and local levels as well. You have state engineers, planners and budget offices that now can get down to begin planning projects. From our perspective, we are very pleased that this has been finalized … it’s very good for the construction industry.

Equipment Finance Advisor:  Are contractors starting to see growth in project backlogs? If so, how will this impact a contractor’s decision to own equipment rather than rent it?

Crum:  The preliminary numbers that we’re seeing indicate that 2015 was a really good year for our customers. Many contractors from all regions of the country made money and the year had a strong finish. Sales were being driven by a couple of factors; the first was that the Highway Bill and Bonus Depreciation got passed. We saw a lot of people make the decision to go ahead and buy equipment … especially in the last ten days of the year. The other factor is that as they crunched their numbers and found out that they actually made a lot of money. That, in turn, moved them to take opportunistic advantage of the Bonus Depreciation.

We are seeing more back log come in and one of the things that’s interesting is that as opposed to other recoveries from the 2008 to 2010 shakeout, there haven’t been a ton of new entrants into the space. So, the ones that made it through remained with more opportunities now available to them. That’s not in the survey, but it’s definitely something we’ve taken note of.

With regard to the trends toward renting equipment versus acquiring it on the contractors’ part, we think this is a trend that will continue. There are a couple of factors that influence that trend. If you are a contractor and you need equipment now, your choices are very good because the market is so efficient. You can get a piece of equipment on very short notice, and whether it’s new or very late model, it’s going to perform the job you need it to perform. On top of all of that, you have multiple rental providers to choose from at any given time.

There are other factors here at play too. There’s still some uncertainty and some contractors may not want to take on a long-term commitment by acquiring equipment. We asked participants what the economics would need to look like in order to compel an end-user to decide to purchase equipment rather than rent it. Frankly, we think the numbers speak loud and clear. Greater than half of the respondents said that the distributors at equipment rental companies would have to raise their rates significantly … something in the range of 15% or more. Twenty-five percent of the respondents said rates would need to increase moderately at 5% to 10%. We think all of this is an important indicator to distributors who may be looking at how they are being compensated for the risk of carrying the rental fleet. Again, we think the end-users are sending a very clear message here.

Equipment Finance Advisor:  As the energy sector continues to decline, more construction equipment utilized by this sector likely will be deployed for other construction usage. How will the availability of this used construction equipment impact sales of new equipment in the U.S.?

Crum:  As traditional construction equipment has been coming out of the energy sector projects, this equipment has come back into the channel fleet. For the most part, this has had a relatively positive impact on distributors and rental companies because margins on the equipment being used in the energy sector were pretty thin due to heightened competition there. Many of the distributors we’ve spoken with -- and we haven’t seen the final results -- say they are now getting higher margins than they were in the energy sector. That may not be true for all since it’s early, but we’re sensing they are able to redeploy this equipment at better margins. So, it’s not as gloomy as many people had predicted.

Equipment Finance Advisor:  Overall, the results of this year’s forecast are positive. Are there any risk factors that you have identified that could negatively impact the construction sector such as interest rate hikes or the continual decline in gas prices that may impact tax revenues for road construction?

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