NEW ORLEANS – There were a record 4.3 million vehicles leased last year, according to an Edmunds report, which said 31 percent of new-vehicle sales in 2016 were leases.

Lease volume has climbed 91 percent over the past five years, and lease penetration — like lease volume — has been on the rise since 2009, but look for that rate to stabilize a bit this year and come in around 30 percent, the latest Lease Market Report from Edmunds says.

In an interview here at the NADA Convention & Expo in late January, Jessica Caldwell — who is executive director of industry analysis at Edmunds — says leasing is so attractive to consumers because, in large part, they’re monthly payment shoppers.

And with the market demand moving to pricier large vehicles, leasing payments can make getting into those vehicles more “attainable” than financing.

A lease payment in 2016, Edmunds said, was $120-per-month lower than the payment on a financed vehicle.  For large pickups, in particular, the gap between lease and finance was the largest: $206 in favor of leases.

Plus, the increasingly high-tech gadgetry of vehicles may entice folks to shorten up their ownership cycles, Caldwell said. Drivers may not keep their cars 10 or 15 years like they did in the past.

But the prevalence of leasing is perhaps tempered by the potential impact to residual values and the flood of vehicles returning to the market from leases.

So, automakers have to find a balance in their leasing portfolios.  There is some risk as vehicles come back off-lease in droves.

For instance, consider the scenario in a couple passenger car segments.

“For people who leased a midsize sedan three years ago, they’re not holding up their values, so people don’t want midsize sedans and compact cars; they want SUVs. So, the residuals are pretty low — lower than what they would have forecasted back in 2013 when they were going to lease out their vehicle,” Caldwell said.

The fact that some values are not holding up as well as expected is a “big issue,” she said.

“That is what the lease payment is predicated on, so there is a balance that I think automakers have to strike,” Caldwell said.

“Even though I think the lease rate could probably go higher if payments were like they are today, they’re probably going to have to back off a little bit,” she said. “I wouldn’t say a lot, because I think people truly like to lease.”

So to strike that balance, automakers are turning to tactics like mileage restrictions, longer leases and adjusting the timing on lease returns, Caldwell said.

In other words, not pulling back massively on the amount of leases they write, but rather maneuvering around the amount hitting the market.

“All of that, trying to just optimize all the vehicles coming back off of lease returns,” she said.

Truck, SUV strength

But some segments are more immune to this issue than others, due to strong used-vehicle demand. Caldwell gives the example of pickup trucks.

“That is one of those ones (where) they’ll lease them all day if they can because there’s so much demand in the used market,” she said.

Large SUVs is another segment where that seems to be the case, she said.

And appropriately enough, trucks and SUVs are where leasing growth is evident.

Reflecting a similar strength in SUV sales — which, last year, were stronger than passenger car sales for the first time — there were 1.9 million SUV leases last year. This slightly beat car lease volume, which dipped in 2016 “in line with with the greater market trend of declining sales,” according to the Edmunds report.

SUV lease penetration, which as recently as 2009 hit a trough in the 15-20 percent range, has been moving upward and hit 32 percent in 2016, according to Edmunds.

Meanwhile, pickup truck lease penetration climbed from 14 percent to 15 percent last year, having shown significant growth since falling below 5 percent in 2009.

“With gas prices low and fuel efficiency improved, consumers are flocking to pickups and SUVs. The downside is the cost as they are considerably more expensive than passenger cars,” Edmunds says in its report. “Leasing reduces this burden and has been an avenue for consumers to purchase pricier vehicles.”

Are current rates healthy?

When asked if these (overall) high lease penetration rates are healthy for the industry, Caldwell said it’s a tough call to make, but that she believes automakers may have to scale back a bit.

Though leasing was sky high back in the late 1990s and early 2000s, it was “still not at this level,” she said.

“So there’s a lot of unknowns for automakers trying to strike that balance,” she said. “For somebody like a luxury company, it’s OK, because this is something that’s build into their business. But everyone else is still trying to hit that sweet spot of figuring out what (they’re) going to do with all these lease returns.”

For a truck/SUV brand like GMC or Land Rover, the off-lease flood could be a positive, since those vehicles currently have high residuals, Caldwell said.

Used-car remedies

One of the ways to handle some of the off-lease volume — and an opportunity for dealers in and of itself — is used-car leasing, Caldwell said.

Granted, it’s a small market, with current penetration rates a little higher than 1 percent, she said. That still is an increase from past rates. And used leasing could be a more affordable option that new cars or certified pre-owned.

Dealers and automakers may be wise to come together and “explore” their options for used leasing, particularly the opportunity presented in luxury, pickups and SUVs, she said.

Used leasing might make sense. Especially since the flow of off-lease volume isn’t likely to dry up anytime soon.

“It’s not as if there’s going to be a point at which this is going to be revered; because it’s not … it’s continually growing, even to this moment,” Caldwell said.

Another opportunity in the used-car market are the pre-owned standalone stores, which four of the six public retailers are incorporating into their strategies.

Auto Remarketing asked Caldwell for her take on these pre-owned stores (which have ramped up in the past year among public retailers) and whether they make sense.

“We know they’re going to have a lot of potential volume for them. And maybe (they could be) like a depot in which a lot of these off-lease vehicles could go. I think it definitely makes sense. A lot of dealers obviously like the used-car business,” she said.

After all, the used-car market is “usually a sweet spot for them,” she said.

These stores aren’t likely to get the same amount of trade-in volume that a new-car dealership would, so there would have to be some kind of strategy around sourcing, she said.

“But it seems like now is probably a good opportunity for that to happen,” Caldwell said. “Five years ago, when we were coming out of the recession, that wouldn’t have even been a possibility because the used volume was so scant … so now is probably the best time of any if you’re actually going to start something like that.”

Article courtesy of Joe Overby, Senior Editor at: http://www.autoremarketing.com