With manufacturers prioritizing retail sales over fleet, Black Book does not expect rental sales to recover until at least 2023. Auction activity – with rental companies buying instead to sell – was the main factor behind the rise in wholesale prices in the fourth quarter of 2021.
Source: Black Book Analysis
Supply chain issues, production shortages and dwindling dealer inventory are putting the car rental industry on edge. Most vehicle segments have actually appreciated, and many units are selling above list price, leaving rental companies scrambling to stock up on whatever they can find.
Dr. Alex Yurchenko, Head of Data Science for Black Book, and his team are responsible for predicting wholesale vehicle values, and it starts with consumer demand in the retail space.
Supply vs demand
Although consumer confidence rebounded around 10% in April, it is still at its lowest level in a decade, according to Yurchenko, who shared this trend and others during a seminar at the International car rental 2022 in Las Vegas on April 25.
Yurchenko said that initially rising gasoline prices did not change consumer behavior. They still bought what was available – big SUVs and big trucks, but not a lot of cars. In recent months, however, this behavior has changed. Due to high gasoline prices, demand for smaller, more fuel-efficient vehicles, such as compact SUVs and cars, is now stronger, he said.
According to Yurchenko, seizures have traditionally been a good source of used inventory for car rental companies, but in the past two years that channel has nearly dried up due to a moratorium on seizures. Help from the government and credit institutions meant that these vehicles did not return to the market.
“We are talking about around 1 million vehicles per year,” Yurchenko said. “Recent trends indicate an increase in seizure volume. The numbers are still low, but the volume of seizures is increasing. »
Supply chain issues – including the continued shortage of chips – are still the biggest factor right now driving this whole scenario. Yurchenko thinks the most optimistic forecast is that the industry will reach some sort of normalcy in terms of production levels by 2023, but dealer lots won’t return to normal levels anytime soon.
Inventory limitations and new sales incentives continue to hit record highs each month. Before the pandemic, the average incentive was about 11% of MSRP, according to Yurchenko. The average incentive in March 2022 was close to 3.5%.
Black Book expects monthly growth in new vehicle sales for the fourth quarter of 2022, but total light vehicle sales are expected to reach just 15 million this year.
Source: Black Book Analysis
“The majority of consumers are paying above list price, which was unheard of a few years ago,” Yurchenko said. He added that dealers are fighting to be first in line to get inventory. The big question is whether manufacturers can produce enough vehicles to satisfy dealers and rental companies. As a result, rental fleet sales will be at historic lows for the third consecutive year.
Appreciate assets
Before the pandemic, there were more than 3 million vehicles on dealer lots, according to Yurchenko. Now there are about 1 million. Used stocks are also hard to find.
“With all the problems we’re having with new production, second-hand returns are going to drop over the next few years, and that’s going to keep second-hand prices high,” Yurchenko said. “We’re going to be in this limited used vehicle inventory environment for a while. Rental units are not coming back on the market. Longer term, leases that have not been sold this year will not return for the next three years.
Rental sales are down about 50% from 2020 to 2022; therefore, the supply of newer used vehicles will be limited over the next few years. Rental sales are expected to decline by around 15% in 2020 and 2021, which will help reduce the used supply three years from now.
Source: Black Book Analysis
Before the pandemic, the average annual depreciation was somewhere in the teens, according to Yurchenko. When the pandemic hit, there was a dip in volume for the first part of the year and then it started to increase. Overall, the vehicles appreciated by almost 30%. This year, depreciation should return to normal levels.
Last year, every segment appreciated, some by as much as 50%, Yurchenko reported. Demand was high, but supply was limited, which caused prices to rise. Full-size vans have been popular for almost two years. Few of them are produced, and there is a high demand for them, so prices continue to rise.
“It’s a good time to sell them, but few people have them for sale,” Yurchenko said, adding that week-to-week price changes are close to 1%. There are three different classes of vehicles depending on their age range, and the trends are mostly similar. In a typical spring market, consumers are looking for vehicles around $10,000. Three years ago, that meant you were buying a 2-8 year old vehicle. Now, to arrive at the same price, you have to look at vehicles that are over 10 years old.
High wholesale and retail prices
Even with the expected price declines over the next two or three years, wholesale prices will still be 30-40% higher than they were pre-COVID, according to Yurchenko.
“With production levels returning to normal next year, the depreciation will reach a normal seasonal level.
According to data from Yurchenko, a vehicle from three years before the pandemic has retained about 50% of its value. Although the residues will decrease, they will still be much higher than this pre-pandemic figure.
The EV Factor
Electric vehicle (EV) sales are expected to gradually increase, accounting for around 20% of new sales by the end of this decade; however, there is a lot to be done for mass adoption, including charging infrastructure, creating a second-hand market, and creating a second-life battery market. More electric vehicles entered the market last year, and their lease penetration rate is higher. There is also an increase in the number of used electric vehicles returning to the market.
“Electric vehicles are still a relatively small segment,” Yurchenko said. However, EV values jumped as they did other segments, dominated mainly by Tesla. Yet the values of electric vehicles are also expected to fall in three or four years.
Interference for rental units
In the first quarter, rental companies almost stopped buying rental-type units in the hope that new inventory would arrive. For the past month or so, rental companies have been back in the US market to buy more units. The problem is that there aren’t many new or low-mileage used vehicles left.
By the end of 2022, Black Book expects prices to decline but not return to pre-COVID levels. Lower new vehicle sales in 2021 will lead to a reduction in the used supply in three years, leading to higher prices.
Source: Black Book Analysis
“For a small fleet of rental cars, it’s hard to get new vehicles and they probably have to pay the retail price,” Yurchenko said, adding that the second-hand market was drying up for new ones. rental fleets. “There aren’t many places where you can buy a low-mileage ’19 or ’20 vehicle right now. A lot of them were bought last year by bigger rental companies. L inventory of these low-mileage used vehicles is shrinking.
Overall auction volume is down from pre-COVID levels, as are dealer-to-dealer sales, direct-to-dealer sales, and consumer-to-consumer purchases.
“The pandemic pushed the industry into this,” Yurchenko said. “This is not new territory; this has only accelerated the change that dealers are now demanding from vehicles through multiple channels. They go directly to consumers, fleets and rental companies to purchase vehicles. »
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