Influx of Used Supply from Rentals to Peak in June; Longer-Term, Fewer New Rental Sales Will Reduce Used Supply and Support Prices
Rental companies are in the process of shrinking fleet sizes in response to reduced demand, leading to a supply of used vehicles that will enter the market in substantial volumes as we enter the summer months. While this will contribute to significant downward pressure on used vehicle prices through June and to a lesser extent July, lower levels of new vehicles being added to rental fleets over the mid- and long-term will stabilize the used price picture, according to the latest Valuation Services Special Market Impact Report from J.D. Power.
"Outsized de-fleeting of rental units currently in service will weigh down used prices near-term, but a significant reduction in new rental fleet sales this year will act as a strong tailwind to near-new used vehicle prices down the road," explains Jonathan Banks, VP of Vehicle Valuations & Analytics, Valuation Services, J.D. Power
Adjusting to the New Normal
Over the past few years, new vehicle sales into rental fleets have numbered around 2 million units per year, and our pre-virus expectations for sales of new vehicles into rental fleet sales in 2020 was a similar 1.9 million units (excluding medium and heavy-duty vehicles).
J.D. Power Analysis of New Rental Fleet Sales
Updated forecasts from J.D. Power estimate that only 1.05 million new vehicles will be sold to rental companies in 2020, representing a 44%, or 831,000-unit, reduction from the pre-virus outlook.
"We expect the bulk of this supply to enter the market in May and June of 2020. This closely aligns to our expectations for when the bulk of deferred off-lease volume will also enter the used market," says Banks.
It's important to note that the rise in off rental and lease volume will be tempered by a reduction in trade-in volume, which will be lower than expected prior to the pandemic as a result of fewer new and used vehicle sales.
"On net, we expect used rental, lease and trade-in volume entering the market to peak in June at around 20% higher than our pre-virus expectations for the month. This increase in used supply, combined with softer consumer demand, will certainly place downward pressure on used prices. However, we expect prices will gradually recover after June as used inventory slowly recedes and consumer demand recovers," Banks says.
The initial impact associated with higher used rental volume hitting the market in the short term will work its way out over the rest of the year as the rental industry reduces its investments in new car purchases to field a leaner fleet in response to reduced leisure and business travel.
"In 2021, we expect used rental supply to fall from an average of approximately 423,000 units per quarter to an average of 260,000 units. Further, used rental supply will get progressively lower as we move deeper into the year. By Q3 of 2021, rental supply is expected to dip below 221,000 units – a significant 47% decline from pre-virus levels," says Banks.
This contraction in supply will combine with a moderate rise in demand to stabilize the price of used vehicles over the long-term.
(To read the entire Special Market Impact Report from J.D. Power visit: https://bit.ly/3cyxFLd)