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Equipment Leasing & Finance

Equipment Managers Face a Dynamic Landscape in 2024

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With supply chain issues off the front burner, managers look at valuation declines and expansion concerns.

MOST OF OUR EXPERTS AGREE: Equipment valuations are down and are likely to remain so for most of 2024.

No surprises here, though. Such a downturn has been anticipated—and yet continued unrealized—for several months.

“It’s been like having the flu three days before you realize it,” says Wade Whitenburg, Strategic Accounts and Finance and Insolvency Management with Ritchie Bros. “Everyone has been waiting and now enough momentum has built up and you’re seeing the impact on the markets.”

“It’s just this time the cycle got drawn out for a longer period versus some others,” continues Whitenburg, who also serves as chair of the ELFA’s Equipment Management Committee.

And it’s one more thing to blame on the pandemic.

“Values are coming off the historic high levels of the pandemic, and increased inventories are leading to declining values,” says Douglas Simon, Senior Vice President, Head of Equipment Management, M&T Bank Corporation.

 

“Asset values pretty much across the board are coming down, in some cases more severely than others,” says James Merz, Senior Vice President and Head of Equipment Management, Fifth Third Bank.

“The surprise is that it took this long,” adds Riley Nemeth, Vice President Asset Management, Wintrust Commercial Finance.

Douglas Simon 
“We’re coming off the historic high levels of the pandemic, and increased inventories are leading to declining values.” 

—Douglas Simon, M&T Bank Corporation

A tale of two markets

“While the equipment finance industry is experiencing some headwinds, there are really two markets here: one for new equipment and one for used equipment,” says Dennis Bolton, Senior Managing Director, Head of North America Equipment Finance at Gordon Brothers. “And the amount of new equipment to be refinanced will be more impacted by the softening of the economy.”

According to Bolton, the tale of two markets is evident in trucking where late-model, low-mileage units remain in high demand as fleets look to expand and/or replace aging equipment.

“Valuations have been somewhat supported by that demand,” Bolton says. “On the flip side, there were so many small operators and owner operators that decided to have their operating authority rescinded, it has put a huge amount of equipment on the market, which has had a dramatic impact on values. Valuations have gone from $60,000 to $80,000 a truck in 2020 to $30,000 to $40,000 now, depending on age, mileage, and how they’re spec’ed.”

“While we expected trucking values to decline, the degree of and how rapidly they declined was a bit of a surprise,” Merz says.

Dennis Bolton
“Right now, everyone is interest-rate sensitive, which will present opportunities for companies that focus on sale leasebacks and used equipment.” 

—Dennis Bolton, Gordon Brothers Equipment Finance

Supply chain is off the front burner… for now

Last year, industries were still reeling from supply-chain chokes. As those concerns have eased, older equipment is coming onto the market in increasing numbers.

“Broadly speaking, supply chain issues have settled down,” Bolton says. “That’s not to say there aren’t still issues, but it’s nowhere near as dramatic as it used to be.”

“As supply chain issues have eased, customers are feeling less pressure to purchase equipment at the end of a lease,” Merz says. “They now have alternatives.”

And today’s equipment managers are aware that supply-chain risk must be managed going forward. “It’s now in the equation,” Whitenburg says.

Sticking with what is known

“As we get further away from COVID, and we see a more normalized supply cycle, people will become selective on what industries they want to finance,” Whitenburg says. “There’s a lot of caution out there with how much expansion they want in their portfolios. If there’s an opportunity to delay and extend, rarely is that invitation declined.”

The rose-colored glasses are coming off, Merz agrees. “Now that residual values are starting to moderate it is as important as ever to have an even keel when setting values as you look at both the short and long term.”

James Merz
“We see a lot of opportunities to finance automation for our customers, and I think that’s only going to increase, especially with the advent of AI.” 

—James Merz, Fifth Third Bank

Another factor is interest rates, which have increased steadily throughout 2023, rising from 4.25% to 4.5% at the first of the year to 5.25% to 5.5%.

“Right now, everyone is interest-rate sensitive, which will present opportunities for companies that focus on sale leasebacks and used equipment,” Bolton says.

Alternative power interest continues, albeit with questions

“Renewable equipment financing is strong and continues to grow,” Simon says. “Corporations are placing an emphasis on it right now.”

This is bolstered by the 2022 Inflation Reduction Act, which provided $369 billion over 10 years to support a variety of renewable and alternative energy initiatives.

For some industries, these initiatives are aligning with goals to reduce labor and maintenance costs. The oil and gas industry, for example, is starting to embrace the use of electric drilling and fracking equipment.

 

“Compared with diesel, it’s at least 30% or more reduction in operational costs,” Bolton says. “It’s pretty dramatic.”

There are still questions about alternative power, however, especially concerning residual value and second life.

“There’s probably no topic that creates more conversation,” says Whitenburg, “and now people are asking the right questions: Who can use it and for how long? What’s the next stage of its life?”

Whitenburg adds another consideration: all government incentives just go to the first-time buyer. When equipment comes off lease or is sold, where does it go and how will it work for the second buyer?

Another market push is automation. “We see a lot of opportunities to finance automation for our customers,” Merz says, “and I think that’s only going to increase, especially with the advent of AI.”

Wade Whitenburg
“I divide assets into two categories: Is it wine or is it milk? Both are marketable, but how fast do you have to move to get some value out of it?” 

—Wade Whitenburg, Ritchie Bros.

With this opportunity, Merz also urges caution. “In a distribution center, for example, this type of equipment is designed for a specific operation. So you have to understand what the operation is, how long they’re going to need it, and whether or not it can be converted to a different use later on.”

Some markets are steady, others have concerns

Several markets received a boost with the passage of the previously mentioned Inflation Reduction Act and CHIPS and Science Act, Simon says, including infrastructure investment, reshoring activities, and semiconductor manufacturing.

“Anything that is associated with an aggressive governmental intervention will probably continue to be hot,” Bolton says.

But be careful about saying valuations are returning to normal, Nemeth says. “A dry van trailer that went for $30,000 in 2019 may have doubled in price during the peak, but now prices are around $40,000,” he says. “It’s not coming back to where it was before.”

Repossessions make their way onto the agenda

“As we work our way through the tail end of post-COVID liquidity, we’re going to see an increase in non-performing assets that will ultimately result in increased repossessions,” Bolton says. “It’s going to be an important topic of discussion, which is why it’s on the agenda at the 2024 conference.”

“Things have been relatively good for quite a long time and there are a lot of people in the industry who haven’t seen a real downturn yet,” Bolton says. “It will be a tremendous learning opportunity.”

“Repos could be on the agenda at any time,” says Whitenburg, “but it will be a bigger factor in the year ahead, especially as several equipment managers haven’t seen a traditional cycle.”

And even gaining clear title on an asset requires knowing how to find your way through the maze of state laws.

“I divide assets into two categories: is it wine or is it milk?” Whitenburg says. “Both are marketable, but how fast do you have to move to get some value out of it?”

Information and networking are key

All of this underlines why equipment managers need to stay on top of the markets they serve, Simon says. “It’s important to stay up on current trends. There’s an overwhelming amount of information available. No one has a crystal ball, but you want to be informed and add value.”

Even more data became available during the supply-chain ordeal, which outlined which OEMs were having issues with consumables and reliability, all of which now can be included in the decision-making process, Whitenburg says.

Riley Nemeth
“Everyone who’s involved with financing equipment needs to have at least one person at the Equipment Management Conference.” 

—Riley Nemeth, Wintrust Commercial Finance

Equipment managers, however, need to know how the data they use is weighted and whether it matches a company’s goals. What can be seen on your phone is rarely the whole story, Whitenburg contends. Key information gaps can be filled in with the relationships developed at such places as the Equipment Management Conference & Exhibition (see sidebar).

“We have a great and willing network of people who can collaborate, share ideas and talk about which way they see markets trending,” Whitenburg says. “If equipment managers don’t build personal networks and they come across something unfamiliar, they don’t have someone they can ask. And that means they’re not going to make the best decision possible.”

Equipment management expertise takes time

Be patient. Equipment management expertise is not a fast track.

“Equipment management is absolutely critical to a leasing company’s success,” Bolton says. “Developing valuation, operational and resale expertise is difficult because there’s so much to know and no school that teaches it. You must know how to buy, sell, and maintain the equipment, and know how it works and fits into a process. One day you’re working on semiconductor assets, and the next day it’s about construction equipment. It takes years to develop.”

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Network, Learn and Grow

“Most of what I know is through experience or knowing people, and this is an opportunity to expand the people you know,” says Dennis Bolton, Gordon Brothers, about the Equipment Management Conference & Exhibition, March 10-12.

“If you don’t develop those relationships you’re left to your own devices,” he adds.

And bonus: This year’s conference is in New Orleans.

“I think a lot of companies are missing out by not going to the conference,” says  Whitenburg. “It really gives their employees a foundation of knowledge and understanding that will pay off handsomely.”

It’s also a place to learn. The upcoming meeting will offer updates on the state of the industry and what’s happening in trucking, construction and technology, among other topics.  

“It gives you time to get away from your day-to-day, valuation transactional business and time to focus on strategy, the future and the big picture,” says Merz.

“Everyone who’s involved with financing equipment needs to have at least one person at the conference,” says Nemeth. “It’s really that simple.”

FOCUS ON: EMERGING TALENT

Appealing to the next generation of equipment managers

How do you attract younger equipment managers to the Equipment Management Conference & Exhibition? Ask a younger manager.

“When it was brought up to me, I was all on board,” says Nemeth, who serves as one of two Prodigy Program associates on ELFA’s Equipment Management Committee. The other associate is Alex Ohanessian, Vice President of Asset Management, Insight Investments.

Under the new program, the two are tasked with offering ideas that will entice younger or new-to-the-industry equipment managers to attend the conference. During a two-year term, they’ll participate in the conference planning and wrap-up meetings. The Prodigy Program will expand to four associates in the future.

Another Prodigy Program assignment is being a conference ambassador, something Nemeth relishes.

“When I went to the conference seven years ago, I was easily the youngest person there,” Nemeth recalls. “As an industry, we can only get better if we bring in everybody.”

 

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