Column: 2021's inventory crunch will become 2024's CPO drought

The calendar will soon say 2024, but franchised auto retailers may come to know the year not by four numerals, but by a formula — 2021 + 36 months.

Because by my calendar, this is the year when yesterday's inventory shortage begins morphing into tomorrow's certified pre-owned conundrum.

In 2021, the pandemic severely disrupted automotive supply chains while government-provided stimulus funds aimed at staving off another Great Depression flooded into consumer households. In simple terms, demand for new vehicles went up while supply went down. Meanwhile, leasing — which had represented nearly a third of retail sales before the pandemic — shrank dramatically as new-vehicle prices rose, then interest rates followed suit.

Leasing penetration rates fell by at least half, depending on the brand. That was not so big an issue at the time of sale, when there is little difference between a customer signing a purchase contract and one signing a lease agreement. But automakers and dealers recognized that the shrinking pool of lessees would make it difficult three years down the road to get those previously regular customers back into showrooms to purchase or lease another vehicle. And if that weren't enough, it would also dry up the wellspring of off-lease vehicles that dealers rely on to convert into more profitable CPO vehicles.

In October, Experian predicted retail leasing returns will rise to 1.1 million in the second quarter of 2024 but then fall to only 640,000 by the end of that year. The decline is expected to continue through late 2025 to a quarterly low of 510,000, it said. The lease rate of all new vehicles was 21 percent in the second quarter of 2023, compared with 28 percent in the second quarter of 2021.

"We are interested in leasing, and we are committed to leasing. I think the days of pre-COVID — when leasing got more financial subsidies than nonleases in the industry and for us — that's difficult to do when we're short on supply," Dave Christ, head of the Toyota brand, told me in September. Leasing, he said, "is just harder with the economics of the deal for a customer to want to lease when you know the subsidy isn't there. Right now, we're not happy with our lease penetration. We are looking for ways to improve that; we want to stay committed to leasing."

J.D. Power said leasing in November was expected to represent 22.4 percent of retail sales, up from 16.4 percent in November 2022, but still well below November 2019 when leased vehicles made up 30 percent of all new-vehicle retail sales.

"The three-year off-lease vehicle is the backbone of the used-car market," said Tyson Jominy, vice president of data and analytics at J.D. Power. He said used-vehicle prices will continue to stay high because of a lack of supply through at least 2025, even though they could swing month to month. But, he said, the impact of the fall of leasing in 2021 could echo through the rest of the decade.

"There's still not enough of those high-quality, low-mileage vehicles out there for dealers to CPO," Jominy said. "So dealers are going to have to get creative. They're going to have to search for vehicles to certify. They're going to have to work through their owner lists and pull those folks back in early, even if they purchased."

Jominy also cautioned that it will take years to normalize again after what happened three years ago.

"Even if we were to start to go back to normal leasing in 2024, those people don't come back to the dealership until 2027," Jominy said. "We could still be suffering the effects of a lack of leases in 2028 or 2029 because of the lack of leases in 2021."