The Off-Leases are Coming! Are You Ready?

“The off-leases are coming! The off-leases are coming!” Like Paul Revere, we’ve been shouting this warning for two years now. Finally, the ramp up in lease penetration is starting to hit the used car market — bringing lower vehicle values along for the ride. “Leasing has been increasing at a fairly steady rate over the last couple of years,” says Larry Dixon, senior manager, market intelligence for NADA Used Car Guide.

Dixon points to 2013 as a tipping point, when consumer lease penetration increased to 23.6% from 20% in 2012. “That’s a significant jump at a time when new vehicle deliveries were increasing, too,” Dixon says.

Of that 2012 to 2013 increase of about 1.1 million units, 61% can be attributed to consumer leases. While the market is absorbing increased lease returns today, the stream turns into a river in 2016.

There’s no question that increased supply will temper values, but we shouldn’t say the sky is falling. As Manheim Chief Economist Tom Webb noted in his monthly conference call last week, a market free fall happens when supply increases are met by a drop in retail demand, driven by tightening credit conditions or a bad economy. These scenarios aren’t likely.

Forecasts call for a rise in interest rates, which would drive up the cost of money for fleet buyers, but this shouldn’t temper a solid retail demand environment too severely. Nonetheless, a confluence of factors will make 2016 a challenging year.

Of ongoing concern to rental fleets is the particular weakness in the two popular rental segments, compact and midsize cars. The compact segment continues to be the weakest, with prices dropping 7.2% in June compared to a year ago, according to Manheim. Midsize cars were also down on a more modest decline.

Compounding the issue is increased lease penetration in the compact and midsize segments, as well as with compact crossovers, which have gone from 15%-20% to 25%, according to Dixon.

The typical consumer lease, written for three years and 36,000 miles, will be competing with de-fleeted rental units in the 30,000-mile range in the auction lanes. Two-year retail leases with fewer miles will provide even stiffer competition. What’s the takeaway? The wholesale market will soon be heavy with compact and midsize cars in the same mileage band.  
 
Two years ago, it wasn’t hard to look like a genius in managing fleet costs. That’s not the case today. It’s time to revisit the plan and renew those best practices. Certified, pre-owned (CPO) sales are robust. Can you lock down on your de-fleeting strategy to make sure your units make the CPO cut?

Trucks and vans continue their strong value retention, with the SUVs and crossovers not far behind. Does your business model support fleeting up in these segments?  

Does a softening wholesale market present an opportunity to fleet up with more used units?

With an abundance of models in the compact and midsize segments, unexpected deals for new units might present themselves. Are you in a position with your lender to ask for a credit line increase to take advantage?

Somewhat surprisingly, the used car market has held up quite well, thank you very much. Some, including me, thought prices wouldn’t have held up this well for so long. Independent of supply and demand, Dixon and others cite the increased intelligence of wholesale buyers and retail sellers as contributing factors.

“There is a greater degree of efficiency today on the part of the dealer body,” Dixon says, “in knowing when to buy, what to buy and knowing demand in a particular area for a given vehicle.”

In addition to off-leases, retail units in general — new vehicles sold in 2010 and 2011 during the Recession recovery — are returning to the market. NADA Used Car Guide projects that by 2017 supply of late-model used vehicles will be 28% higher than in 2014.

“It’s time for that churn,” Dixon says. “Increased supply is a fact.”

Originally posted on Business Fleet