The Car and Truck Fleet and Leasing Management Magazine

Off-Lease Wave Poses Risk to New-Vehicle Sales

March 26, 2018

Photo by Eric Gandarilla.
Photo by Eric Gandarilla.

Nearly 3.9 million off-lease vehicles are expected to return to market over the next year, according to Cox Automotive’s 2018 Used Car Market & Outlook report.

This wave of off-lease vehicles is expected to be one of the biggest threats that the new-vehicle industry will face over the next year.  And, it's not the sheer volume that will pose the biggest risk; the biggest risk will come from the type of vehicles that this off-lease wave will be composed of.

The off-lease vehicles entering the market through 2018 and 2019 are expected to be predominantly SUVs, CUVs, and pickups — the very segments that are seeing the most demand in the current market, and that have been a boon to the new-vehicle industry in recent years, according to Cox Automotive’s report.

These off-lease vehicles will provide consumers with relatively new, low-mileage vehicles for the segments that they're after, at a lower price than their new counterparts, and with many of the same features.

“These are not stripped-down, baseline versions of higher-end nameplates, as most, if not all, will have touch screens, Bluetooth connectivity, and other key features consumers crave. This will be a significant threat to some new-vehicle segments as used products will provide a viable alternative for some car shoppers,” the report noted.

The off-lease vehicles entering the market over the next year are different from the off-lease vehicles that have returned to market in recent years due to the fact that the off-lease vehicles that returned to market in recent years were mainly cars. These were cars that had been purchased prior to 2014, in the years following the Great Recession when spending power was low and gas prices were high. Consumers short on cash that wanted to spend as little on their cars and at the pump heavily favored small, fuel-efficent vehicles.

After 2014, however, when gas prices began to drop and the economy began improving, consumer demand began shifted toward larger SUVs, CUVs, and pickups. Due to the nature of three- to four-year lease terms, the type of off-lease vehicles returning to market had yet to catch up to current consumer demand.

By the end of the year, Cox Automotive expects the used industry to sell 39.5 million used vehicles and 16.7 million new-vehicles, representing 0.5% year-over-year growth and a 2.3% year-over-year decline, respectively.   

This would represent a new record for used-vehicle sales, and the continued decline for new vehicles. In 2017, used vehicles saw a record year for sales, totaling 39.3 million vehicles sold. Conversely, new vehicle sales totaled 17.1 million, which represented a 2% year-over-year decline.

“The U.S. economy in 2018 is ripe for continued strength in used-vehicle sales,” said Cox Automotive Chief Economist Jonathan Smoke.

One factor that could negatively affect the used-vehicle industry in the coming years, however, would be the continued rise of interest rates. Rising interest rates could be offset for new vehicles through incentives, but the same can’t be done for used vehicles. If the Fed continues to hike interest rates, consumers may be turned off of used vehicles and corralled toward new.

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The term used in some European countries, e.g., Spain, for closed end leases, which ordinarily include the lessor assuming responsibility for maintenance and tire costs in addition to residual value risk.

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