Can you say “Buyers’ Market”? Well, it is if you are interested in shoring up your owned fleet to make ready for 2016.
With this buyers’ market, I am referring to all types of construction equipment, both new and used. These units will be available from dealers, rental companies, other contractors, auctions and maybe even banks that have had to take control of units because of defaulted loans.
Prices for both new and used equipment are falling for any number of reasons. Rouse reports that August auction sales were 7.2% lower than the previous month. That alone would not scare me, but when their reports also show that this is the fifth consecutive month of declining values, that gets my attention.
Various other reports I review consistently support the price declines on both the retail and OEM sides. With the energy markets creating an excess of rental equipment, that excess is causing a reduction in rental time and dollar utilization, thus resulting in lower anticipated rental fleet purchases in 2016. These negative rental trends cause an increase in used equipment available for sale, as well as lower OEM production schedules, which in turn have an impact that lowers both new and used prices.
These are perfect conditions for you if you are in the market for some specialized equipment for your owned fleet.
Financial Incentives to Purchase
Before we get too carried away, let me say that I am only a fan of owning equipment that is specialized and not available in a rental fleet, or units that are used daily and thus subject to missed opportunities if you were to try to rent these units on a consistent basis. In short, if you really need it, then now is a time to explore the new and used equipment markets.
If you decide you do need additional equipment, there are other reasons to make a move now. Specifically, we are talking about financing availability and tax benefits to go along with attractive pricing.
A couple of months ago, we discussed the financing markets (“Credit Conditions Ease for Equipment Buyers”) and passed along contact information to help you finance a purchase. At these interest rates, I suggest you take advantage if you can. In addition, using a lease to finance the equipment allows you to save on capital and protect your balance sheet.
I keep hearing that 50% bonus depreciation is going to be on the table for 2015-16. To use the bonus for this year, the equipment has to be new and delivered to you by December 31, 2015; otherwise, the bonus should apply again in 2016. There was also talk about extending the Section 179 rules, which can be applied when used equipment is purchased. After 2016, I suspect these tax benefits will no longer be available.
A few months further back, we also discussed ways to cost out the use of your equipment for either bidding or costing a job (“Bidding for Equipment-intensive Contractors”). If you need a shortcut to allocate costs, you can use external rental rates as a guide. If your jobs are mostly weekly in nature, then use weekly rental rates. If they normally run three to four weeks, use the monthly rental rate. You can prorate those rates for any extra day or two you add to or delete from the job timeframe. But keep in mind that rental company rates are probably conservative in terms of your actual cost to own and operate the equipment. You may want to kick them up a bit.
Even though equipment values are falling, the outlook for construction in 2016 and beyond is good, and if that comes to fruition, I expect equipment prices to again firm up. We seem to have come across a unique situation where the energy market recession is causing an excess of available construction equipment that has to be sold off in order to maintain proper ROI.
So if you really need some equipment — and can justify owning it — now is the time.
Garry Bartecki is the managing member of GB Financial Services LLP and a consultant to the Associated Equipment Distributors. He can be reached at (708) 347-9109 or firstname.lastname@example.org.