ACG: ‘Cautious Firms Quicker to Lease vs Buy New Equipment’

The Associated General Contractors of America (AGC) noted in a recently released report based on a survey conducted as part of the 2012 Construction Hiring and Business Outlook that the outlook for the construction industry is mixed for 2012, as firms must balance growing demand for certain private sector market segments with continued weakness in key sectors, the near end of the stimulus and declining overall demand for public sector construction.

According to an analysis of survey responses from more than 1,300 construction firms conducted by the AGC and Computer Guidance, the industry is not likely to experience a recovery until at least 2013 despite some growing positive trends.

The report included the following excerpts on “Tight Credit” and “Lease, Instead of Buy New Equipment” commentary:

Tight Credit is Delaying or Canceling Many Projects

The report notes that tight credit conditions do not appear to be affecting most firms’ ability to attract new credit. Yet cautious lending practices are having what appears to be a significant impact on the construction market. That is because tight lending conditions are forcing many owners to delay or cancel construction projects, according to the survey results. While only a small number (14%) of firms report being directly impacted by tight bank credit conditions, nearly half (49%) report that tighter lending conditions have caused their customers to delay or completely cancel construction projects.

Construction firms working in the highway sector were least likely (46%) to have projects they were working on canceled or delayed because of a lack of financing. Conversely, firms working in private office development were most likely (54%) to have projects delayed because of tight credit. Meanwhile, highway as well as water and sewer contractors were more likely to have had difficulty attracting financing for their firms (16%). And interestingly enough, contractors working on private office buildings were least likely (13%) to have had difficulty attracting financing for their own firms.

Cautious Firms are Quicker to Lease, Instead of Buy, New Equipment

As the commercial construction industry remains mired in a downturn that began in earnest in 2008, they continue to evolve their equipment strategies. Instead of purchasing new equipment, many firms report leasing. While 49% of firms reported purchasing new equipment in 2011, significantly more (69%) reported leasing construction equipment. Even when firms added new equipment, however, their investments were relatively modest. For example, 60% of firms reported that their equipment purchased totaled $250,000 or less last year while 70% leased equipment totaling less than $250,000. Given the fact many new pieces of construction equipment cost well into the six figures, this means appetite for new equipment is tepid.

The trend towards leasing, instead of buying, new equipment is likely to accelerate in 2012. While only 40% of firms report they plan to purchase new equipment this year, nearly two-thirds (66%) report they plan to lease new equipment. As with 2011, firms’ appetite for new equipment is likely to be modest this year. Fifty-seven percent of firms will invest $250,000 or less on new equipment purchases in the new year while 70% of firms plan to lease $250,000 or less worth of construction equipment.

Despite the relatively bleak outlook for new highway construction, more firms working in that market segment reported they were likely to purchase new equipment (47%) than in any other market segment. More firms working in private office development (62%) reported they were not planning on purchasing new construction equipment. Meanwhile, more construction firms working in the retail, warehouse and lodging segment (66%) reported plans to lease new construction equipment in 2012 than any other segment. Thirty-eight percent of firms working in manufacturing reported no plans to lease new equipment, more than for any other market segment.

To read the full report issued by the AGC: click here.