Off-lease volumes are likely to climb significantly this year, causing some concern in the industry about a downward impact on residuals.

But as Manheim chief economist Tom Webb outlined in his dissection of a few leasing “facts” and “opinions” during a press conference at the NADA Convention & Expo, 2014 shouldn’t necessarily be the focal point.

“Fact: there are many analysts out there and some lessors who are concerned about the flow of off-lease volumes this year destroying residual values. Opinion: I think they’re focused on the wrong year,” Webb said.

“They should be focused on 2016, when the volumes are going to be much, much higher, and we cannot be guaranteed that the retail environment will be as favorable that year as it is this year,” he added. “Chances are, it won’t be.”

NADA Used Car Guide’s Jonathan Banks echoed some of those same thoughts during another press conference at the convention, saying that it may be 2016 and 2017 when the market sees a “much bigger wave of lease returns than we’re going to face in ’14.”

Banks’ presentation indicated that that there will be likely be 284,000 more off-lease units in the used-car supply pool this year. But take that with a historical grain of salt, as the presentation points out.

Yes, off-lease supply for 2014 will be higher than where it was in 2013. However, it is expected to be 11 percent smaller than where it was in 2009.

That increase for 2014, of course, precedes what will likely be growth to much more meaningful levels of off-lease supply in coming years.

The 2014 Used Car Market Report from Manheim forecasts just more than 2 million off-lease units for 2014, but then around 2.5 million for 2015 and 3.0 million for 2016.

“The industry’s ability to absorb these off-lease volumes has been questioned by some. Rest assured that all of these off-lease units will be subsequently retailed in the used-vehicle market — and in short order, for a profit,” Manheim’s report indicates.

“The question is only to what level prices need to adjust to effect these transactions. It is likely that the needed residual adjustments in 2014 will be modest. Keep in mind that, unlike 2002, next year’s off-lease volume will be coming back into a more favorable retail market — and one which is considerably larger,” it adds.

Consider the certified pre-owned market, as illustrated by this example from the report:

Twelve years ago, the size of the CPO market didn’t even add up to two-fifths the size of the off-lease pool. A decade and change later, 2013 off-lease volume numbers were 23 percent smaller than the CPO market.

“Nevertheless, in 2014 (and more significantly in 2015 and 2016) it will be important that lessors continue to improve their remarketing processes and ensure that all units are properly exposed to all potential buyers,” Manheim’s report indicated. “Grounding dealers will not be willing, or able, to acquire the same large share of off-lease units that they have in recent years.”

Handling Additional Off-Lease Volume

When asked during an interview at NADA about lease returns, Experian Automotive senior director Melinda Zabritski said the market should be able to handle the impending off-lease supply increases for this year.

She said the consumer demand will be there on the retail side; the key point to consider is making sure the industry’s internal infrastructure will be equipped to manage the higher off-lease volumes that will be hitting the wholesale market.

And that includes extra staffing, something that Greensboro Auto Auction general manager Jerry Barker has made arrangements for in preparation for the off-lease volume increase.

“We have been anticipating it for about a year. And we’ve hired some key people: we hired an assistant marketing manager; we’ve hired some additional people in the fleet department to go ahead and get them trained and up to speed,” he said.

“We’ve also hired some additional inspectors to make sure we can handle the volume,” Barker said, also noting that the auction owns a trucking company and has added a few extra trucks to its fleet.

“We’ve been anticipating it, and we can see the increased volume. We’ve also worked our Internet (programs) more, because with more cars, we had to reach out further, because a certain geographic area can only absorb so many cars,” he continued. “And we’re a pretty substantial sized auction, so with us running 3,000 to 3,500 cars a week, we have to make sure we have the dealer base to come and buy a good percentage of those cars every week.”

In recent years, industry-wide used-car supply has been relatively low. With more volume coming in, that does change the day-to-day operations of an auction like Greensboro.

“It has changed. With off-lease cars, I definitely think we sell a better percentage. I think a lot of us were relying on the rental cars, because that’s who had all the cars for a couple years,” Barker said. “I think we have to look for the buyer now to buy the 2- and 3-year-old car, where for a long time we were looking for the buyer to buy the current-model-year car.

“When we do a search for who’s buying what makes and models, for a couple years we were pretty heavy on the current-year-model. Now we’re backing up two or three years and seeing who buys those models,” he continued.

On the consignor side, there is additional room for growth, as well.

GM Financial, for one, is in a bit of a unique situation — and it’s one that comes with some opportunity. The company began leasing in late 2010, so those cars are just now starting to come off lease and should only increase from here, said senior vice president of asset remarketing Dan Heinrich. 

He says GM Financial is excited about this since in the sense they have a new type of collateral to offer dealers. So to help spread the word about the off-lease vehicles it can now offer dealers and create excitement, the company is now running a “Rock Your Shocks Off” sales event tour.

Comparing it to a music tour, “Rock Your Shocks Off” began Feb 5 and will run through July.

The tour is meant to introduce this new type of collateral from GM Financial to its dealer base and includes nine stops at eight auctions across the country.

The first sale was held Feb. 5 at Columbus Fair Auto Auction in Ohio. It featured 400 vehicles, almost 90 percent of which were sold, Heinrich said. Complete information about tour stops and other details can be found at auctions.gmfinancial.com/elite.

Using CPO to Push Brand Strength

With more cars coming in off lease, Black Book’s Ricky Beggs sees certified pre-owned programs as a means to foster brand and residual value strength.

“One of the ways to look at (the increase in off-volume) is, where are those cars going to go and how can a brand maintain their strength, maintain their residuals, as much as anything?” Beggs said during an interview at NADA.

“Especially with the off-lease volumes coming, because hopefully what sells today and the level it sells today and tomorrow is going to have an impact on what that residual forecast is going forward,” he added.

This is where certified programs can come into play to solidify that residual and brand strength, Beggs said.

“CPO is valuable. It is a good sign of brand strength,” he said. “CPO basically raises value a little bit because you’ve got a better car, you’ve got a warranty behind that used car from the manufacturer. So that’s a way to keep that up.”

Editor's Note: This story appears in the March 15 print and digital editions of Auto Remarketing magazine, both of which are available now. Go here to view the digital edition.