Railcar operating lease market heats up

Recently I fielded a call from the president of a regional railroad who is an old friend. He had some boxcars on his railroad that he was leasing from one of the major operating lessors. The cars were up for renewal and when he received the lessor’s rental quote, he went into sticker shock. He was calling me to get my view on the rents he was quoted to see if the market rates had, indeed, risen to the heights he was quoted.

Unfortunately, for a good number of his cars, it has.

For some time, I have been using this column to advocate that lessees of operating lease railcars take a good hard look at locking up the rental rates that have been available over the last 24 to 36 months for longer terms. True, many operating lessors were unwilling to do 60 month leases at the rock bottom rental rates that were in the market during this period, but we suggested that, even at a bumped up rental number, locking up rentals for the longer term made sense.

This was an easy call for this writer or any grey-beard who has been in this industry for a decade or more. Whatever goes around comes around, and it was only a matter of time before the market turned.

And, as it turns out, the market has turned for many car types. In preparation for this column, we talked to our friends among the operating lessor fraternity and asked them about the status of their off-lease fleets.

Virtually all of them reported that in most industry types, their cars were out working again. Exceptions? Centerbeam bulkhead flatcars and bulkhead flatcars designed to serve the construction industry and still parked in the weeds. We also heard that while a good number of the nation’s operating lease coal cars are back working, they are doing so at rates that are generally less than the operating lessors deem compensatory for the investment they have made in the cars.

But just about everything else in the general purpose railcar operating lease fleets are at rates that are making lessors smile—and, in many cases, lessees gag.

Here are some examples we gleaned from our operating lessor conversations (all rents are for full-service leases of one to three years):

Boxcars: The market has really heated up for this car type, particularly 100-ton, Plate F cars with 286 capacity, which are being quoted at $500 to $550 per month depending on door configurations. A year ago, those rents would have been $425 to $450 per month. What about 70-ton, Plate C cushioned boxcars? Rents at this point in time are being set at $425 to $450 a month, with one lessor pointing out that this car type can be put in the National Boxcar Pool on per diem rent but earning well. The rents we uncovered for rigid 70-ton boxcars were all over the board, ranging from $250 to $400 per month. (We expect that condition issues come into play here.) However, both rigid and cushioned rental rates are at least $100 to $150 more than they were one year ago (and significantly higher than they were two or three years ago).

Grain cars: Virtually all kinds of grain cars are out working in one of the hottest grain markets in some time. Our sources tell us that older 4,750s are being rented for $425 to $450 a month. This is at least $100 more than the rent quotes of a year ago and $200-plus more than rents quoted for this equipment at the market low. Larger grain cars, 5,150s, are being rented for $525 to $550 per month—again, $100 or more than a year ago.

Sand/cement cars: This market is hot due both to infrastructure reconstruction and need for cars for new oil and gas markets. In fact, we could not find anyone quoting rents for available cars. One lessor, however, quoted us $525 for new equipment expected to be available soon.

Mill gons: The market for mill gons is not quite as active as the market for other general purpose railcars. We found quotes of $475 to $500 for available equipment that had a 286 capacity (up $50 from a year ago). Equipment that has a 263 capacity was quoted at $375 to $400 per month (again up $50 from a year ago).

Plastic pellet cars: The market for all sizes of this car type is heating up, including the smaller sizes, which are renting for $350 to $400 per month after a period where thousands of these cars were parked unutilized.

Tank cars: While this car type is too specialized to treat in the space I have remaining in this column, the general report is that demand is up for virtually all of the car types in this group and that it continues to strengthen.

So, where is the market going? If you take a look at the strengthening rail traffic and rail employment trends that are regularly reported by the AAR and the fact that most of the railcars parked during the last three to four years are now out working, the market for operating leased cars should remain strong. Net/net? In the absence of a double-dip recession, rents have nowhere to go but up.