Car Leasing in Decline Due to Pandemic, Could Take Years to Recover

Vehicle leasing has declined since the pandemic began, and is not likely to return to normal for several years, according to executives and analysts.

The decline in leasing is largely due to the vehicle shortage that has affected the car industry for more than two years. Auto manufacturers usually make more money from selling cars outright, rather than leasing them, which usually involves a larger subsidy from the manufacturer. With inventory constrained, car companies have significantly reduced attractive lease deals that had been a staple of auto retailing.

Auto makers are unlikely to revert to more-generous lease terms until vehicle availability rebounds closer to prepandemic levels, executives and analysts say. Even then, the relative dearth of people who leased cars in recent years will produce a lag effect, drying up what is normally a steady stream of customers returning to dealerships. It could take the better part of this decade for the lease market to normalize, some analysts say.

"The cycle is definitely out of cycle," said Jaycie Dane, general manager of sales operations for Toyota Motor Corp.'s Lexus division in North America. Leases accounted for 20%-25% of Lexus sales in recent months, compared with prepandemic highs of around 40%, she said. "It'll be a rocky road for a few years."

The percentage of Americans leasing new vehicles dropped to the lowest levels since the financial downturn around 2009, averaging about 16% of overall retail sales in the second half of last year, according to research firm J.D. Power. That amount is roughly half of what it was before the Covid-19 pandemic.

Leasing a car typically offers buyers a more affordable monthly payment compared to financing a vehicle purchase. For dealers, lease returns offer repeat business and help feed used-car inventory.

Auto makers keep lease payments lower by subsidizing the transaction through their financing arms. This allows them to hold the car as an asset and essentially rent it to the customer for a period of three or four years. At the end of the term, drivers can either buy the vehicle at a preset price or return it to dealers.

In recent years, manufacturers haven't had much motivation to use leasing to stimulate sales, because a computer-chip shortage and other supply-chain snarls have left dealership lots thinly stocked. However, with the recent increase in demand for new cars and trucks, manufacturers are once again turning to leasing as a way to help boost sales and keep customers happy.

According to data from credit-reporting firm Experian, the average lease payment rose to $567 in the third quarter of 2022, a 25% increase compared with the same period two years earlier.

The monthly payment to lease a new car has shrunk compared to the cost of financing one, dealers and executives say. In November, for example, the average lease payment for a new Honda HR-V small SUV was $374, according to data from car-buying research site Edmunds. This is about $100 less than the cost of financing the same vehicle.

"If you're looking to buy or lease a vehicle, your prices are going to be pretty similar," said Ryan DeNooyer, general manager of Kalamazoo, Mich., dealership chain DeNooyer Automotive. He noted that about 20% of his customers have been leasing vehicles in recent months, compared to 45% before the pandemic.

U.S. vehicle inventories are slowly rebuilding. According to research firm Wards Intelligence, there were nearly 1.7 million vehicles on dealership lots or en route to stores at the end of 2022, up 49% from a year earlier. However, this is still roughly half of the prepandemic levels.

Auto makers are unlikely to significantly sweeten lease terms until stocks are more fully rebuilt, said Peter Muriungi, chief executive at Chase Auto. This is because they need to rebuild their stocks before they can offer more attractive lease terms.

He said that manufacturers have no need for it.

The decline in leasing activity underscores the market disruption that has played out in the car business since the onset of the pandemic. The inventory crunch and subsequent high prices have limited choice for consumers and changed the way Americans buy cars.

This year, analysts expect higher interest rates and recessionary fears to cool record-high prices. In addition, improved inventories should help to bring prices down.

Auto executives say that leasing is an important aspect of their sales strategies. Leasing allows them to boost customer loyalty and replenish their dealers’ used-car inventory.

GM's finance chief Paul Jacobson has said that the company expects leasing to be a good option for electric-vehicle customers as it prepares to launch several new EV models. This is in line with other automakers who are also offering leasing options for their EVs in order to make them more accessible to consumers.

Jeff Dyke, president of publicly traded auto retailer Sonic Automotive, figures his company's lease portfolio will be smaller for the next couple of years. However, he expects auto manufacturers to eventually increase spending on lease promotions.

"The pandemic has disrupted the ecosystem, and we need to get it back on track," Mr. Dyke said.