Will leasing rally in 2023?

Experts are predicting that leasing will grow as a proportion of auto sales in 2023 after falling last year to what Cox Automotive said was its lowest share of the market in at least a decade.

Affordability concerns and increased automaker incentive spending are expected to help drive that growth, experts said.

Cox Automotive projects that leasing will represent 21 percent of new-vehicle retail sales in 2023, up from an estimated 19 percent in 2022, according to Charlie Chesbrough, the company's senior economist.

Even with that expected jump, the share of customers leasing this year will still be below 2019's pre-pandemic levels when lease deals made up 30 percent of retail sales.

Alex Yurchenko, chief data science officer for Black Book, also expects 2022 will mark the bottom of the industry leasing collapse brought on by the pandemic and inventory shortages. Yurchenko said Black Book projects that lease share will grow to "above 20" percent of sales in 2023, and while it's going to start increasing, lease share won't return to pre-pandemic heights anytime soon.

The increase will be welcome news for some dealers, particularly those representing brands with customers who are more vulnerable to the affordability pinch. Some national dealer council leaders cited leasing when queried about how an automaker or its captive finance company could encourage vehicle sales amid rising interest rates.

"Kia's finance arm and all the captives need to get back into leasing because leasing always provided an avenue for consumers to afford cars and also gave the manufacturer a guaranteed base that they could maintain a huge percentage of in two to three to four years as the lease expired," said James Morrell, co-owner of Destination Kia in Albany, N.Y., and chairman of the Kia Dealer Advisory Council. "Leasing has always been where captives have excelled and provided a huge base of owners for the brand."
But leasing is less of a near-term priority for other dealers.

"We definitely want the turn," said Ryan Nesta, finance director at Rohrman Auto Group, referring to leasing's ability to generate repeat business once the lease term ends. Lease sales can boost a store's allocation eligibility, an edge not taken lightly during the inventory shortage. However, "I don't know if we're clamoring for it just yet."

Rohrman, of Lafayette, Ind., ranks No. 47 on the Automotive News list of the top 150 dealership groups based in the U.S., with retail sales of 20,024 new vehicles in 2021.

Leases historically have offered customers cheaper monthly payments than loans. The average new-vehicle lease in the fourth quarter carried a $587 monthly payment, up from $558 a year earlier, according to Edmunds.

But leasing "certainly has fallen off dramatically," Chesbrough said, attributing the trend in part to higher vehicle prices driving less-affluent consumers — a demographic more likely to lease than buy — out of the market. The decline also reflects the lack of leasing promotion among automakers.

"The deals just haven't been that good," he said.

Automakers slashed such promotions as the inventory shortage led to higher natural demand for vehicles.

Typically, overall incentive spending represents a double-digit percentage of a vehicle's sticker price, Yurchenko said. But "they didn't have to put incentives anywhere," he said, adding that he expects the trend to reverse.

Lease End COO Zander Cook, whose company buys or helps consumers finance off-lease vehicles, said that incentive decline isn't sustainable.

"I have to think at some point that's going to break," said Cook. "And I think that's going to break in 2023."

Automakers spent 2.6 percent of the average vehicle sticker price on incentives in December, down 0.7 point from a year earlier, according to J.D. Power. In pre-pandemic December 2019, automakers spent 11 percent of sticker on incentives to move vehicles.

Another factor in the leasing slowdown: Higher used-vehicle prices meant vehicles coming off lease appreciated in value considerably. So many lessees who typically would return their cars and sign fresh leases instead bought their off-lease vehicle and kept the equity, Chesbrough said.

Higher projected incentive spending and consumers' affordability concerns are expected to turn leasing rates back up this year.

Increased vehicle production is likely to be accompanied by reduced consumer demand because of economic uncertainty, Yurchenko said.

The average new-vehicle loan initiated in the fourth quarter of 2022 carried a $717 monthly payment, up from $659 a year earlier, according to Edmunds. That's $130 a month higher than the average lease payment for that period.

Some car loan payments have now approached levels once more on a par with mortgages or rent payments. A record 16 percent of borrowers in the last three months of 2022 agreed to pay $1,000 or more monthly on vehicle loans, up from 11 percent a year earlier.

"Affordability is going to be a growing issue," Chesbrough said. Monthly payments are too high for "huge swaths of the population."

While rising interest rates add to the cost of borrowing, Danny Battaglia, managing director of J.D. Power division ALG Customer Success, said higher rates don't necessarily spur leasing. But rate hikes do increase the so-called money factor, the interest assessment on a lease. Automakers can still lower monthly lease payments by increasing the residual value on the paperwork, or the projected value of the vehicle at lease-end, Battaglia said.

Automakers are rebuilding their inventory levels at different paces. Chesbrough said the Detroit 3 are better positioned than Asian manufacturers, with some domestic-brand models back to 2019 inventory levels.

To meet their internal sales targets this year, some automakers will need to give customers a lower price point, Chesbrough said. Leasing can help.

"There may be a little bit more pressure to be a little bit more aggressive [on leasing] for the Detroit 3," he said.

But all automakers face pressure to lower vehicle costs for consumers, Chesbrough added. The big question: Can they retain market share while keeping prices high and discounts low? And, should Ford Motor Co., General Motors and Stellantis slash prices, would Asian brands with less inventory hold the line?

Honda has lost share and could discount leases to regain it, Chesbrough said, but other Asian brands might keep leasing on a tighter leash.

Black Book expects growth in leasing "across the board" in 2023, Yurchenko said.

Jasmine Figueroa, finance director at Headquarter Hyundai, part of a Florida group that also has Mazda, Toyota and Honda stores, said she doesn't foresee enough of an inventory rebound to support much in the way of lease deals this year.

"We are seeing more inventory throughout all the manufacturers," Figueroa said. "But still, I don't think it's enough."

Will automakers strive to keep leasing shares much smaller permanently?

When 3-year-old cars come off lease and sell at a massive discount to new vehicles, that can siphon off some new-vehicle buyers, Chesbrough said.

"Certainly in the luxury side, that can really, I think, be damaging," he said. "So I think there are benefits to not having as many used vehicles out there."

Yurchenko agreed that prospect would be attractive to automakers, but he said they face pressure to increase volumes and regain market share.

Battaglia said an automaker's best course would be few or no incentives, as they reduce used-vehicle value.

But the industry is likely to break, and automakers will try to match each other on all types of incentives — leasing and otherwise.

"Everyone's telling us that they're going to be disciplined," Battaglia said. "So we're listening to them, but I wouldn't put my money on incentives staying this low over the next couple years."

Carly Schaffner contributed to this report.