Tudor Van Hampton for ENR

Demand for rented machines, such as this boom lift, has rental fleets gradually replacing units.

As construction continues its slow recovery, sales of new construction machines are expected to remain muted next year, with flat to slightly positive movement in 2013, analysts say. The market expects rental companies and dealers that operate rental lots to drive much of the sales, as they did this year.

Rentals on the jobsite continue to grow as contractors keep a close eye on their balance sheets. Caterpillar sells 35% of new machines to rental fleets, said Chairman and CEO Doug Oberhelman earlier this year at the Bauma exhibition in Munich. He expects that percentage to rise soon to as high as 50%. "That means their dealer organization is going to have to put anywhere between $3 billion to $4 billion of new equipment on their balance sheets," says Frank Manfredi, an equipment analyst in Mundelein, Ill. "The dealers are in the rental business whether they want to be or not, and it's a big business."

Maintaining a healthy rental fleet that commands profitable pricing and utilization figures calls for gradual machine replacement each year, and rental companies are doing just that. Rental rates will climb 4% by the end of this year, United Rentals estimates in its third-quarter results. United expects its rental capital expenditures for 2013 to top $1.1 billion.

Manufacturers and dealers report that inventories have been shrinking to match this year's sluggish business, and delivery times for machines and parts are stretching out. While rental firms typically place orders in November for March and April delivery, some had to start ordering in August and September of this year, one United manager tells ENR.

Some observers see construction activity giving sales a boost next year. Deere's fourth-quarter earnings report, issued on Nov. 20, forecasts a 10% rise in construction machine sales in 2014, after slipping 8% in 2013. Likewise, Manfredi forecasts a 5.7% jump this year and a nearly 7% jump next year on housing and private construction growth. "Non-residential construction is coming back, and construction employment is beginning to pick up nicely," Manfredi explains. "That's all good for equipment and for rental."

United, which posted a record 49% adjusted pre-tax margin in the third quarter, and other rental firms "are the only ones buying equipment right now," says Charles Yengst, an equipment analyst in Wilton, Conn. He is less optimistic about the machinery market, forecasting sales of new equipment to slip 5% in 2013 and remain flat in 2014. "I see virtually no growth," Yengst explains. "Money is not being spent on construction or in-vestment in any great way. Most of it is maintenance."

Is rental the new normal for construction? Perhaps in the short term, as many contractors can't justify dropping $225,000 on an excavator or wheel loader. However, Yengst thinks construction firms will return to the showroom if the economy becomes more predictable. "You are going to have a complete switch if you get a better economy," he says. "If you give anybody profits for six to 12 months, they are going to figure out how to do their business cheaper, and it's always cheaper to own equipment. That's why you don't have a rental car in the garage."

As for pickups and larger work trucks, pent-up demand from contractors' delayed spending is expected to push up sales next year. Pickup sales will continue a five-year climb to nearly two million units, a 2.4% annual rise, according to IHS Automotive in Detroit. Heavier trucks also are being replaced, notes Steve Tam, vice president of analyst ACT Research, Columbus, Ind. It forecasts sales of new heavy-duty trucks to rise 14.4% next year, with vocational trucks jumping 24.3%. "It's much easier to hold onto vocational equipment longer, since it doesn't drive as many miles," Tam says. "We are seeing relief of pent-up demand that was the result of skipping purchases."