Contractors slow to borrow to purchase equipment
Construction executives have been in no rush to talk to their bankers about financing equipment purchases even as the market for new building heats rapidly in northern Nevada.
Instead, a survey by Wells Fargo finds that many construction executives are willing to rent the equipment they need for a while longer.
The mix of purchased and rented equipment is growing more important to lenders in the area as construction activity picks up steam quickly.
“The trends in northern Nevada appear to be escalating faster than the national averages, and we expect that pattern to continue,” says Karen Pomazal, senior vice president for marketing at First American Equipment Finance, a subsidiary of City National Bank. “The perceptions of northern Nevada are changing quickly, and we believe the area will continue to attract more and more entrepreneurs.”
The worries of construction executives, however, are rooted in their recent experiences rather than their future hopes.
“This market feels like a hangover from the last recession,” says John Crum, national sales manager for the Wells Fargo Equipment Finance Construction Group. “Contractors are concerned that the recovery may not be here to stay.”
The hangover is all the worse in Nevada, where the booming construction business hit the ground hard during the recession, says Steven Pratt, the Wells Fargo equipment finance sales manager for Nevada.
Pomazal says her company, too, sees caution among its construction-company borrowers.
“Construction companies are definitely acquiring equipment to manage increased demand,” she says. “However, they’ve learned a lot and are favoring short-term rental agreements over long-term ownership as a way to mitigate the risks of another recession.”
Borrowing for purchases of heavy equipment also have been dampened by rising prices.
Equipment that meets strict new EPA emissions standards — “Tier IV” standards in industry parlance — carry price tags much higher than older equipment.
And because Nevada was relatively late to come out of the recession, demand for new equipment elsewhere in the country already had pushed prices upward.
Contractors’ inclination to rent rather than buy is reflected in higher rental rates.
The Wells Fargo survey found that 58.7 percent of respondents nationally see equipment-rental rates that are higher than a year before. That compares with about 45 percent who report rising rental costs a year earlier.
Still, that doesn’t necessarily translate into a desire to finance purchases of equipment to replace machines that currently are rented.
About 60 percent of the respondents to the Wells Fargo survey nationally said they expect to purchase less than 25 percent of the equipment they’re now purchasing.
Even though the caution among equipment buyers doesn’t translate into lending business for bankers, it’s not necessarily bad news for the financial sector, says Pratt.
Wells Fargo, for instance, is working closely with several equipment-rental firms that need to build their inventories to meet the growing need.
While demand for construction equipment has been rising in northern Nevada — whether it’s purchased by a contractor or by a rental firm — Pratt says the overall market for equipment financing in the region has seen some softening as the mining sector pulls in its horns.
Specialized mining equipment doesn’t lend itself to use on a highway job, but much of the equipment used in mine-construction projects can be re-purposed for other work.
Battle-scarred contractors who are spooked about debt also are digging into their own resources to make equipment purchases, rather than looking for institutional financing.
“There’s a lot of cash payments for equipment these days,” says Crum.
Despite ongoing difficulties, Northern Nevada’s office real estate market will endure, experts predict
IGT’s decision to list its 1.2 million sq. ft. campus for lease this month and the recent $3.8 million sale of Harley Davidson’s 3-story financial services building in Carson City are the latest examples of companies no longer needing larger-scale office properties to maintain productivity levels and meet customer needs.