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The Construction Equipment Glut - Separating Fact From Fiction

Date: Feb 01, 2012 @ 07:00 AM
Filed Under: Asset Management

Despondency is no stranger to Americans when contemplating the years of gloom following the start of the Great Recession. Sadly, it is not a secret that our prospects for experiencing any meaningful relief from the malaise in the near-term are, plainly, not good.
The U.S. economy by some estimates is expected to grow at a pitiful rate of only 2% for the foreseeable future. Most consider the root cause of this frustrating era in our history to be the collapse of the U.S. real estate market in general, and particularly the U.S. housing market which was artificially propped up by Fannie Mae and Freddie Mac.

It doesn’t take a Harvard Business School M.B.A. to predict what will likely happen to a U.S.-based construction company when the bottom drops out of the U.S. housing market: It will tank. And that is exactly what happened to thousands of U.S.-based construction firms since the beginning of the most recent U.S. recession which technically began in December 2007 and ended in June 2009.

It goes without saying that the resulting “ripples” throughout the larger economy have been fierce and many. The distress brought on by the proverbial correction that continues to be experienced by the entire supply-chain and beneficiary-chain connected to home building is staggering. To name just a few: laid-off construction employees, the places they shop, mortgage lenders, mortgage brokers, participants in the capital markets in general, equipment finance companies that extended credit to any of the constituents of the homebuilding supply chain, institutions providing lender finance to those equipment finance companies, and unfortunately, the list truly goes on and on and on. Disaster.

The Result: THE GLUT

Focusing our attention on the equipment finance industry, the appropriate response to the destruction was taken: spectacular retrenchment. The sheer mercilessness of the shutdown of the flow of credit into the construction industry was arguably matched only in shock and awe by the brutal and relentless cascade of defaults flowing right back to those creditors from the same construction industry seeking more credit. The surge in defaults was followed by an astounding corresponding surge in construction equipment repossessions which, in turn, flooded the U.S. construction equipment market with a fantastic amount of surplus used equipment originally manufactured only to meet voracious appetites of homebuilders planning on building homes that no longer needed building.
The result? THE GLUT.

Fast Forward to Today

The outlook for the housing market is dismal. The U.S. Census Bureau released its U.S. November Construction Spending Report on January 3, 2012. According to the report, the first 11 months of 2011, construction spending was actually lower than the same period in 2010 by 1.1%. The U.S. construction industry is certainly not expanding. And it will not expand until the housing market begins to expand again. That won’t happen until the glut of foreclosures is cleared and a period of adequate sustained growth in the U.S. economy (greater than the 2% growth rate we’ve been hearing about) is experienced. There is a very good chance that this mess will not work itself out for at least another five or six years…or longer.

In general, equipment leasing and finance companies continue to consider the construction sector a risky sector and, therefore, continue to restrict the flow of credit to construction companies.

The translation? Even today, four years later, the supply of construction-related assets coming off-lease and resulting from repossessions continues to far outstrip the demand from U.S.-based construction companies.

What is Happening to All That Construction Equipment?

There have been dramatic changes in the end-user buyer base of the used construction equipment market and the way this equipment trades. This marked shift over the last few years has been characterized most notably by a shift in the primary end-user base from domestic to international. The current buyers can be divided into two categories: 1) U.S. construction industry survivors and thrivers (they really are out there), and 2) international buyers. The latter continues to be recognizable by its ferocious appetite for such equipment.

Even against a backdrop of stagnation in the U.S., Africa, Europe, Japan, Canada and Mexico, today we see a convergence of global macro/economic factors at play which have fostered a vibrant and highly liquid international market for U.S. off-lease and repossessed construction equipment. Currency exchange rate chasms, a hefty source of available equipment supply from the U.S., global natural disaster clean-up and rebuilding efforts, and good old fashioned growth-driven demand abroad particularly from the BRIC nations (Brazil, Russia, India and China), Peru, and Colombia - have combined to generate a very active market into which some U.S. remarketing companies are exporting heavily.

Is There Still a Glut of Used Construction Equipment in the U.S.?

Although the international market for construction equipment has really heated up, some distribution channels for this equipment (for example, a large number of remarketing companies and even larger OEMs that have taken back used off-lease and repossessed construction equipment to sell through their own traditional channels) have failed to take advantage of it.

It cannot be said with accuracy exactly how much construction equipment constitutes our current glut, but equipment remarketers that have plugged into the international market effectively are having no trouble selling this equipment rapidly and consistently for the equipment leasing and finance companies they support.

What About Equipment Values?

The author believes that, from a global perspective, there is more demand for U.S. repossessed and off-lease construction equipment than our international buyers are able to tap into. It is the responsibility of equipment managers at equipment leasing and finance companies and their third-party remarketers to take advantage of all communication outlets available in the 21st century to truly plug into the global market. This means heavy investments in technology infrastructure and marketing as well as a tremendous amount of initial heavy lifting to expand to an international platform, but the benefits of doing so will far outweigh the costs.
Even against the backdrop of the doldrums of this U.S. and European period of slow growth, the modern remarketing firm fields a great number of offers daily for used construction equipment. These offers come both from the international market and the U.S.-based construction industry end users who have survived the storm and continue to grow their businesses prudently.

The effect that our current economic conditions have had on the values of off-lease and repossessed construction equipment is a relative question. The answer is: It depends whether or not the remarketer you asked is plugged in.

Richard Henderson
President | EquipmentEngine Financial Services Company, LLC

Richard Henderson is President of EquipmentEngine Financial Services Company, LLC, a full-service asset-management and third-party portfolio servicing company founded in early 2010 with a straightforward mission: Bring dramatic improvements to the quality, pricing, and flexibility of third-party portfolio services available to equipment leasing and finance companies by changing the model.

Our unique platform leverages the highly liquid and powerful EquipmentEngine Marketplace® which is rapidly closing in on 100,000 unique visits per month, our LEAN Six Sigma inspired EEFSCo Logistics Model® that radically reduces repossession, transportation, and storage costs, and our feverish commitment to our Experience “WOW!” Everyday® client-centric approach to managed services.

Email Richard Henderson at or visit

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