Despite low interest rates and plenty of available capital, the market for leased or financed office equipment has been flat for the past few years. The missing ingredient has been confidence in the economy, the lack of which has caused some business owners to scale back or put off investments in equipment.
But that may change in 2017 and 2018. Financial firms, dealers, and market watchers agree that confidence in the economy is on the rise, and businesses are now more willing to take advantage of accessible capital at favorable rates. That’s critical for growth in a market where the vast majority of equipment is sold through lease arrangements.
The source of this new optimism is the expectation that the new, business-friendly administration in Washington will make the right moves to spur growth. This presents a welcome opportunity for dealers who, as a group, have struggled to grow equipment sales for the past few years. That opportunity is bolstered by strong competition among leasing and financing providers for dealers’ business, and by new programs offered by those institutions that take into account the way dealers sell and package products and services.
“I see so many leasing companies pushing for business from us, from every dealer,” said Mike Sarelson, President and Owner of Commonwealth Digital Office Solutions. “It’s very competitive. I’ve never seen the rates lower. It’s a dealer’s world for dealing with leasing companies and getting good rates.”
Moving from Flat to Up
Last year was flat for the entire equipment leasing and financing industry, not just for office equipment, according to Ralph Petta, President and CEO of the Equipment Leasing and Finance Association (ELFA). “The industry in the US is about a trillion dollars in volume, and this is everything from copiers to telecommunications equipment to commercial aircraft,” he said. “The trillion dollars is about two-thirds of overall business fixed investment in equipment. So overall, in the US businesses spend about $1.5 trillion in residential and commercial equipment and software.”
The total leasing market-volume for office equipment in 2015 is $40 to $50 billion. Ralph Petta, ELFA
ELFA is a key source of data for the equipment leasing industry. It surveys its members—all of which are involved in leasing and financing—each year to take the pulse of the industry. The 110 members who respond to the Survey of Equipment Finance Activity represent about $120 to $130 billion in financing volume. Those responding from the office equipment sector comprise approximately 4 percent of all financing dollars captured in the survey, according to Petta.
Extrapolating that out, the total leasing market-volume for office equipment in 2015 (the last year for which ELFA has complete data) is $40 to $50 billion. “Most of that is in the dealer channel,” said Petta. “To the extent that the dealer or vendor offers a financing program, that program is typically offered by one of our members.”
Lessors are starting to see the effects of the positive attitude. “For the first time in several years, we see some of the dealers being optimistic in terms of growth,” said Michael D’Errico, Office Imaging Market Leader at CIT. “We haven’t really seen the numbers behind that yet, but we’re still early into the year.” He added that CIT expects to grow both its dealer and manufacturer programs this year.
While the lease market has been flat, lease performance has been good over the past few years. This reduces risk for lessors, and it is a big reason why they are eager to expand their business. ”Credit quality has been good for the last five years, ever since the economy stabilized,” said Fred Carollo, Vice President of Originations, Office Products at EverBank Commercial Finance. “As a result, portfolio performance has been outstanding in the industry and for us specifically. That’s a reflection of the credit quality.”
Washington, DC-based dealer Commonwealth Digital, for example, has a $10 million in-house lease portfolio, and its over-90-day past due is less than $5,000, according to Sarelson. “You better choose wisely if you’re going into the leasing business. Every once in awhile you have a problem. People go out of business. People have issues.”
Good credit quality has been offset a bit by low interest rates, but that may change soon. “It continues to be a historically low interest rate environment that all of us are experiencing,” said Carollo. “We are all starting to feel that we are about to be in a slight or moderate rate increase environment. A lot of things affect it, but we’ve seen a slight raise, and we are watching what the Fed is doing, too.”
The recent minor rise in interest rates resulted in a slight decline in portfolio performance, but not enough to concern lessors or dealers. “In such a historically low rate environment, that was expected,” said Carollo.
Credit quality has been good for the last five years, ever since the economy stabilized. Fred Carollo, EverBank
Geography can make a difference in terms of rates, capital availability, and portfolio performance. “This particular area lives off the federal government. You have all your business associations, you have all these contractors and subcontractors to all the big guys. They are all really good credit-worthy companies, said Sarelson. ”We rarely get turn-downs.”
Some states that had been most impacted in the 2009 financial crisis, affecting the credit-worthiness of businesses there, have rebounded and returned to normal portfolio performance standards, said Bob Hunter, Senior Vice President of Sales, Office Technology for Lessor at DLL. Those states include Florida, Nevada, and California.
Other areas are still in a down cycle, Hunter added. “There are challenges in oil-dependent markets such as Texas, Louisiana, and the Dakotas,” he said, adding that those areas will continue to struggle until the price of oil goes above $40 a barrel.
The dealers will have to go through an educational process with their customers [to understand how to handle higher rates]. Bob Hunter, DLL
Potential Clouds on the Horizon?
Everyone ENX spoke with tempered their optimism with a bit of caution, recognizing that the positive climate they see is based on yet-to-be fulfilled expectations. “I have made a few speeches lately, and I’m inserting the words ‘irrational exuberance’ to describe the seeming disconnect between perception and reality,” said Petta. “Do people feel good just because of government officials’ pronouncements and things they read, or is that going to be tempered by the continued inability of Congress to make things happen and agree on policy?”
Petta also noted that we haven’t had a recession in seven or eight years. “We’re pretty long in the tooth in the business cycle. Does it mean things are going to start pulling back in 2017 or 2018? If that were to occur, our industry and others would be impacted,” he said. “Things are going well, but there’s that little undercurrent that reminds us that things have been good for so long that they cannot remain that way indefinitely. ”
And what happens if the Fed raises interest rates? While there is some concern about how that will affect business, the consensus is that the effect would be minimal. “As interest rates pick up a little bit, the pricing situation might be a little different,” said Petta. “It might create some opportunities or it might create some challenges. Right now margins for office equipment and other types of equipment are compressed. The margins are so thin because cost of funds is low. In short, despite gradually rising interest rates, it’s a good time to lease and finance equipment.”
Petta continued: “Some within the leasing and finance business are welcoming the rise because they feel it gives them a leg up to finance the asset because it will become too expensive for the business to get a commercial and industrial loan. Finance companies feel that they are in a position to be able to offer very competitive pricing and compete even better because the end user is going to have to absorb higher interest in a bank loan.”
“Prior to 2016, it was commonplace for competitive finance companies to lower lease rates in an attempt to buy more market share,” said Dominic Janney, Vice President of Sales and Servicing for Canon Financial Services (CFS). “We began to see market lease rates level off during the first three quarters of 2016, as the financial markets began to prepare for potential movement by the Fed to raise interest rates.”
For the first nine months of 2016, the three-year swap rate (the benchmark borrowing rate) stayed close to the 1.00 percent range, according to Janney. “Since September 2016, the three-year swap rate has increased 76 base points, from 1.05 percent to 1.81 percent on March 31 of this year. This increase has resulted in several finance companies raising their leasing rates for the first time in several years.” He expects this trend to continue as interest rates are forecasted to increase for the remainder of 2017.
Prior to 2016, it was commonplace for competitive finance companies to lower lease rates in an attempt to buy more market share. Dominic Janney, Canon Financial Services
“It’s a rising-rate environment. That’s clearly all over the news, but it’s still at a low. We don’t think that’s going to be an impact to the end‑user customer. I think the level of leasing in the office imaging market will still remain strong,” said D’Errico.
Hunter notes that interest rates rise when the economy is doing well, but he understands why some partners that have cost-per-copy charges based on very low interest rates could be concerned.
“The dealers will have to go through an educational process with their customers [to understand how to handle higher rates],” he said. That might require deconstructing bundled leases to more clearly define how much is hardware, consumables, or software. The introduction of the new accounting standards will also put pressure on the market to deconstruct bundled leases for large end-users.
Despite knowing the potential risks to the economy, the office equipment industry is excited about the next 12 to 24 months. “Our customers are upbeat, the market is upbeat. People are feeling better. They are spending more money. 2017 will be a big plus for everybody,” said Sarelson.
Lessors that saw a strong 2016 expect more growth in 2017. “Capital availability for end users has come back to where we were before the recession hit, and this is a good thing!” said Fisher. “Our credit quality remains strong and charge-offs are at historical lows, adding to our bottom line.” She added that GreatAmerica expects to see its 24-year record of growth to continue next year.
Fisher believes that GreatAmerica will succeed by focusing on what it does well. “There appears to be less uncertainty in the economy now that the election dust has settled and the Fed has sent quite a clear signal of their intentions over the next year. In spite of these factors which we are unable to control, our focus remains on helping our customers and providing as much value to them as we can,” she said.
That seems to be the best advice for both lessors and dealers. The economy, politics, interest rates, and consumer confidence will always present a degree of uncertainty. Staying focused on delivering value is the best hedge against the risks they present.