Like everything in the fleet industry, vehicle depreciation has been impacted by the COVID-19 pandemic. To get a better understanding of future remarketing trends, it is helpful to know how the used-vehicle market has evolved since the start of the pandemic, the impact of the shelter-in-place lockdowns, and the dynamics of today’s emerging economic recovery.
When the shelter-in-place lockdowns started in mid-March, resale prices in the wholesale market dropped significantly as uncertainty grew about the full impact of the unprecedented COVID-19 pandemic. Similarly, the pandemic-induced decline in business prompted many companies to adopt a variety of cash conservation strategies. One strategy was to adjust depreciation rates to reflect the realities of reduced corporate cash flow.
“Fleet clients implemented new depreciation rates to minimize monthly expenditures. Initially, these adjustments were made to assist cash flow as industries suffered due to the economic conditions and restraints,” said Mark Donahue, manager, analytics for Emkay. “As the economy begins to stabilize and companies return to work, we find that adjustments in depreciation are now being made as drivers hit the road and new behaviors/trends are being captured.”
Another impact to the shelter-in-place mandates was that industry-wide fleet mileages declined, especially with those fleets that were deemed non-essential.
“As the total miles driven decreased in 2020, fixed costs associated with fleets determined to be non-essential have increased,” said Justin Dudeck, product director, ACT of LeasePlan USA. “To help counteract this, we have explored opportunities with these customers around extending lease options to alleviate some these costs and meet the new replacement projection timeframes set with the OEM.”
For businesses identified by the government as non-essential, many were forced to idle their fleet vehicles for almost three months, which, on average, represented 6,000 fewer miles driven. These shelter-in-place mandates also extended to many fleet service providers. There were widespread temporary closures of businesses that impacted fleet remarketing such as dealerships and physical brick-and-mortar auctions. In addition, all OEMs temporarily closed their factories in North America, which cutoff the pipeline of new replacement vehicles for drivers whose fleet vehicles were earmarked to be taken out of service.
At the same time, there were a series of massive layoffs and furloughs occurring throughout the economy. With these massive layoffs, there was a bump to the sale of used fleet vehicles to layed-off employees who were driving company vehicles, since there was limited inventory in the market and the employee sales price was often lower than the retail prices for comparable used vehicles. Often these company vehicles were the sole vehicle in the layed-off employee’s household
“We considered depreciation to be more of a lagging indicator of the impact of the pandemic. Early into the shelter-at-home period, sales volumes, prices, and depreciation were fairly stable. As sales outlets closed and resale market uncertainty set in, used-vehicle prices fell and depreciation increased year-over-year,” said John Wuich, vice president, strategic consulting services for Donlen. “More recently, sales volumes not only have returned but, at times, outpaced 2019. Prices have also increased as new-vehicle production was halted between mid-March to late May 2020, resulting in a decline in depreciation year-over-year.”
All of these market variables accentuated the uncertainty in the resale market. Demand for used vehicles diminished and overall resale prices declined, but not all fleet vehicles segments were affected equally.
“By segment, vans were an anomaly, as sales volumes remained low and fleets hung on to these vehicles,” said Wuich. “The downsizing in mobility fleets resulted in an average vehicle age at sale that was down considerably year-over-year. In turn, prices for the sedan and compact SUV fleet appeared artificially inflated.”
Starting on March 18, 2020, the first automotive assembly plants started to temporarily shutdown due to concerns about virus contagion by assembly plant workers. By the end of March almost all assembly plants were closed in the U.S., Canada, and Mexico. It wasn’t until mid-May that assembly plants one-by-one started to reopen with the last of the plants becoming operational in early June 2020.
Resale Market Rebounds
After COVID-19 was declared a pandemic, depreciation rates increased during the spring months of 2020. Then, to everyone’s surprise, the resale market started to dramatically improve during the last two weeks of May as many states started to re-open their economies. This released pent-up buyer demand for both new and used vehicles.
Even though the physical in-lane auctions were closed, there was a widespread adoption by dealers of online sales, which no one would have predicted as early as the beginning of this year.
During the summer, the government stimulus monies started to arrive and many consumers used their stimulus checks as a downpayment for a used vehicle. While retail demand was strong, there was an ongoing shortage of used vehicles in the market, which created a favorable supply/demand ratio for used vehicles that triggered a robust resale market.
“As summer approached, we felt a rebound in the market due to a limited supply in both new and used vehicles,” said James Crocker, director, remarketing for Merchants Fleet.
As a result, the resale market during the summer of 2020 was a sellers’ market with conversion rates unlike any prior summer market that the remarketing industry experienced. Demand was strong and resale prices were high, stimulated by the shortage of used vehicles. Also, ongoing low interest rates for consumers for auto loans and higher-trade-in values supported higher transaction prices.
“The increasingly ‘warm’ resale market created greater confidence in fleet customers and we saw the factory order process start to return to norm,” said Wuich of Donlen.
Likewise, Crocker of Merchants Fleet cited the positive impact to resale prices caused by the shortage of used vehicles in the wholesale and retail markets.
“Overall, the increased supply of late-model, low-mileage, vehicles entering the remarketing arena saw strong wholesale remarketing results. Dealers struggled to get new inventory and demand for this segment soared. Dealers needed used inventory to fill the void from the limited new-vehicle inventory they had to sell,” said Crocker.
Demand for Vocational Vehicles
The strongest vehicle segments for commercial fleets are vocational vehicles, service vans, and utility trucks. All of these segments are outperforming the resale guidebooks by up to 15%-18%.
Historically, there has always a strong market for vocational vehicle but the pandemic caused this demand to go through the roof, especially as the inventory of these used service/utility vehicles was very limited.
While many segments of the macroeconomy were being battered, other segments were experiencing robust business. For instance, the construction market has remained strong during the pandemic causing a strong demand for utility vehicles and work trucks. In addition, with the majority of the population sheltering-in-place at home, there was a surge in home improvement causing a jump in contractor demand for used work trucks and vans.
The entire resale market for used trucks continues to be very strong and the resale values have been hitting record highs.
“Used trucks felt the largest impact as resale values soared in the third quarter with supply dwindling and demand constant. Deprecation on pickups lead the industry with under 6% deprecation over at 12-month basis as well as full-size vans not far behind with under 8% deprecation rate,” said Crocker of Merchants Fleet.
On the wholesale side, resale prices for full-size pickups have increased 23% since the first week of March. On average used trucks were achieving double digit increases in resale values. One factor contributing to this increase is that fuel prices are stable and remain relatively low, which helps to stimulate demand for full-size trucks and SUVs.
The rule of thumb is that when fuel prices are low, it stimulates sales of larger vehicles and when fuel prices are high it stimulates demand for smaller vehicles. Consequently, one of the weakest vehicle segments today in terms of resale values is subcompact cars, primarily because fuel prices continue to be relatively low.
Although sedans as a percentage of fleet vehicles are declining as more fleets switch to crossovers and small SUVs, sedans continue to bring strong returns in the wholesale market. The forecast is that sedans will continue to have good resale value into 2021, especially as the volume of sedans at auction continues to get smaller. As the inventory of sedans in the wholesale market reaches equilibrium with buyer demand, their resale values should continue to be strong.
One area of future concern is the resale values for crossover models. The saying in the wholesale market is that “What sells good new, sells good used.” While crossovers are selling very strong in the new-vehicle retail market, it is causing an increase in supply in the wholesale market, which may lead to some softening of resale values. Although resale values of crossovers and small SUVs may be softening due to increased inventory, their resale values continue to remain strong.
As of press time, there was some softening industry-wide in resale values in the month of October 2020, but most fleet remarketing professionals say this is simply a function of the market returning to more normal levels traditionally experienced during the winter months.
Despite earlier predictions by industry remarketing analysts, so far there hasn’t been a large influx of repossessions and off-lease vehicles entering the wholesale resale market. Many of the off-lease vehicles never made it to auction because they were scooped up by the grounding dealers to supplement their limited inventory of used vehicles to sell to retail buyers.
Nevertheless, the resale market is seeing the volume of repos creep up, but financial institutions are continuing to work with lessees to avoid repossessions, which is putting the brakes on the number of repos destined for resale. But the anticipation is that next spring and summer is when we will see an increase in repos in the wholesale market. One variable is that there may be another government stimulus package, which could further defer the return of some repos and off-lease vehicles.
So, what can we expect in resale values in early 2021 calendar-year? The anticipation is that resale values for used vehicles, in particular used trucks and vans, will continue to remain strong for the next three to six months, well into the spring market of calendar-year 2021.