Construction Slowdown Hammers Equipment Values

Patchogue, New York-based DHS Contracting - which does excavation and land clearing - owns a lot of what you might call heavy metal. Caterpillar payloaders, Kobelco excavators and Takeuchi loaders - small bulldozers - are parked on the firm's lot. And that's the problem.

As this equipment

A New York Building Congress report projects construction spending will slide 22 percent to $26.2 billion by 2010, including a nearly 30 percent drop in nonresidential construction to $7.1 billion.

Government construction spending is expected to slip 15 percent to $14.4 billion by 2010.

The construction slowdown isn't only leading to less work, but hurting the sales and decreasing the value of construction equipment, also known as yellow iron.

"The value of equipment is based on demand," said Dennis Brophy, branch manager for Hoffman Equipment Co. "If demand goes down, the value goes down."

The construction slowdown has already claimed some equipment dealers as casualties. Hedco in Bohemia and Formula, with a branch in Medford, both went out of business a few years ago.

"That reduced the competition out here and has allowed those of us who remain to survive on less," Brophy said.

Although a slide in equipment's value might seem to have a mere abstract effect on contractors' books, it has a real impact, affecting the ability to trade equipment in toward new purchases and lowering asset value as collateral for loans.

"It affects your credit line. A lot of times when you go for a line of credit, some places want certified appraisals for equipment," said Karen Stiriz, president of DHS Contracting. "No one's going to certify a [high] value for something when they can't get it. The equity in your business is less."

Companies end up sticking with old equipment because their machinery no longer brings them the bang for their buck they expected.

"When you go to trade it in, you feel it's worth something because it hasn't been used a lot," Stiriz said. "Because the market has come down so much, what you thought you had in trade-in value isn't there."

Joseph Hodkin, a partner at Melville-based industrial equipment appraiser and liquidator Daley-Hodkin, said values from scaffolding to bulldozers and cranes to cement mixers are down.

"The market has fallen in concert with the values of industrial, commercial and residential real estate," Hodkin said. "No one wants to invest in equipment unless they absolutely need it. And dealers are not buying for stock."

Hodkin said dealers are reluctant to acquire large shipments of new yellow iron out of fear that it will sit on lots for months. "If you don't have the contract to support the cost of the equipment, you're thinking very hard before you're going to spend money on something, regardless of the price," Hodkin said.

He said dealers are discounting new equipment to "spur sales." Sales and incentives, such as free service and zero-percent financing, are becoming more common.

"There are better deals," Brophy said. "The manufacturers are coming to the table, helping us move some equipment. We're taking what we can as opposed to nothing."

But many companies don't have enough work to justify investing in new equipment during a down economy.

"I would love to buy new equipment, but I can't afford it," Stiriz said. "I could get a deal, but if I can't make the payments because I don't have the work, the deal isn't any good."

This isn't the first time there's been a yellow iron meltdown. Construction equipment prices slipped in the late 1980s following a construction slump exacerbated by high interest rates.

"The housing market slowed down," Stiriz said. "Equity in the equipment went down. Everybody held onto their stuff and rode out the storm."

In order to get work, builders are becoming more flexible, putting old equipment to new uses. Stiriz's firm, for instance, has expanded to include home renovations.

"I'm just trying to keep my head above water," Stiriz said. "Because the market is slow."

Credit: Claude Solnik