Demand for used machinery rises as lag time for new equipment grows

Editor’s Note: This is part of a series of articles analyzing the state of the used heavy equipment market in 2018. Click here to see the full set of articles in this series.

A great time to sell

Demand for used machinery rises as lag time for new equipment grows

By Joy Powell

With the construction industry continuing its upswing, some manufacturers have lag times of nine months to as much as a year for new equipment. Meanwhile, the inventory of used equipment is getting eaten up and prices are rising, dealers say.

“You’ve had strong growth and strong output while you’ve also had strong demand, and the supply is having a hard time keeping up with the growth in demand,” says Michael J. Murray, a regional manager for Associated Equipment Distributors (AED). “It’s a very, very good year for the industry; it’s actually been a good 18 months.”

Across the board, he says, dealers report robust sales, parts and service activity.

“The way to look at it is that a rising tide lifts all boats when it comes to used equipment,” Murray says.

“If there’s liquidity in the market and optimism is strong and people are doing projects, whether it be building houses or paving roads, you’re going to have more equipment sales. And that’s going to be both new and used equipment.”

Len Kirk, president and CEO of Hayden-Murphy Equipment in Bloomington, Minnesota, says that when prices on new equipment go up and availability of new equipment goes down, the used market ramps up proportionally.

“Used values go up in concert, if you will, with the new equipment availability and the new equipment price,” Kirk says. “And right now, the availabilities on a lot of equipment are out until late third to fourth quarter, or until the end of the year.

“That said, if you have a good relatively late-model trade-in, either on the dirt side or the crane side, it’s going to bring more money because the guy’s got a project to build and he needs the equipment to do it.”

Hayden-Murphy has two sides to the 61-year-old business – cranes and roadbuilding – and sells to customers worldwide.

“A lot of our big customers have a lot of work, big backlogs,” Kirk says. “We deal a lot in structures, bridges, roads. We’re heavily involved in the wind industry, which is both cranes and non-crane. These guys have to build the roads to get to the towers through the farmers’ fields and all that, so it takes a big variety of equipment.”

AED sees the same strong economic activity going into next year.

“We think that it’s going to be strong through 2019, barring some kind of financial collapse that can’t be predicted,” Murray says. “All the indicators show that optimism is up, consumer confidence is up. So, all signs are green.”

Murray says that while manufacturers are making more equipment it’s not helping the contractors who need to get roads paved and holes dug now and can’t wait nine months to a year for delivery. That brings a cascading effect.

“If a contractor is in the market for a new machine, but he’s aware of the lag times for buying that new machine, he’s wary of selling his current inventory,” Murray says. “He doesn’t want to sell an excavator and not be able to replace it with a new excavator. So, all that is driving the used machinery inventory down, which drives used prices up.”

Bracing for the tariffs and higher prices

Due to the new tariffs on steel and aluminum, dealers who haven’t already seen hikes are bracing for higher prices on some machinery, depending where it’s built, says Murray.

“We’re getting some pretty significant price increases from our manufacturers because of the tariffs,” Hayden-Murray’s Kirk says. While that’s particularly true on the crane side, he says, the impact has also been felt on the company’s non-crane side.

Some manufacturers raised prices even when the tariffs were just speculative, Kirk says.

“We haven’t seen much of a price increase to this point, but absolutely, everybody is telling us that they will be going up,” says Messick, whose family owns five construction and farm equipment stores in Pennsylvania operating under the name Messick’s.

“We are starting to see some upward adjustments in freight rates. I’d expect, too, a little bit of a pullback in financing rates and discretionary money by the end of the month. So, it’s likely we’re going to see some cost increases here.”

How will this effect sales of used equipment?

“If anything, it makes them become more appealing when the new equipment becomes more expensive, although that does usually take some time to work through,” Messick says.

“The units that are sitting here on the lot today don’t immediately become more expensive when these prices change. It will take some months before new inventory comes in that’s actually more expensive. A year from now, yeah, maybe used equipment will look more appealing than it might be today.”

“It tends to be that when construction isn’t doing well, agriculture is, and the inverse is happening right now,” says Messick, who is one of seven family members involved in the dealership. “Construction’s doing quite well and agriculture’s struggling. So, we always seem to find a customer.”

Kirk also noted the growth of the rental industry for heavy equipment.

“There’s a lot of work, a lot of activity, and rental is becoming a larger piece of our business,” Kirk says.

“People want to have Hayden-Murphy be their banker and have us take all the risk, and that’s why we have such a large rental fleet across our lines. Rental is here to stay and it’s only going to grow.”

Does that bite into sales?

“We’ll selectively rent trade-ins if they are later models,” says Kirk. “We’ll make the decision if we’re going to rent it or just turn it to cash and sell it; it depends on the situation.”

How are values holding up

Kirk offers some insight. His dealership sells Wirtgen, Hamm, Kleeman, Vögele, GOMACO and Link-Belt excavators, among other brands.

“On the crushing side, values are holding strong on used equipment because of a shortage of certain models,” he says.

“On the reclaimers and mills, the same holds true. They’re going up year-over-year probably 5, 6 percent. We’ve got a large fleet, so a lot of our equipment we rent to the first user, and then that guy sends it back for whatever reason, but that doesn’t change the value of the machine. We price to market and get good value for machines.”

“On the asphalt pavers, used values haven’t gone up much just because of the nature of the beast. When you put a first load of asphalt through a paver, you’ve got heat, dirt and vibration, and the residuals go down pretty quickly,” Kirk explains.

“With the compaction equipment – the rollers – they’re a bit of a commodity. They hold their value, but not as much as the other product groups – the mills and reclaimers and the crushers.”

“Used excavators don’t hold their value that well if they’ve got 8,000, 10,000 hours on them,” he adds. “We know what they’re worth. But it’s not like you’re going to hit a homerun when you sell them.”

Reasons to buy used equipment include saving thousands of dollars on each purchase and leaving more money to invest in other areas, according to the Independent Equipment Dealers Association (IEDA).

Downtime is the biggest obstacle for contractors to work around, the organization says, and buying new equipment certainly does not reduce it.

Also, IEDA says, replacement parts are easier to obtain for used machines compared to new equipment, and used machinery retains its value better.

Those advantages coupled with a backlog of new equipment and a strong construction market are keeping dealers in some parts of the country busy selling construction equipment, used and new.

“Our customers are in good financial shape,” says Messick. “They’re all busy. There’s plenty of work out there. So, we’re continuing to see an up market, for the most part. We’re selling more new, and used is keeping pace OK. … We’re carrying a larger amount of inventory, but we’re still selling through that inventory at a reasonable rate.”

Read more from our 2018 Used Equipment Report: