Off-lease tide faces uncertainty

Hundreds of thousands of car owners confined to their homes amid the coronavirus pandemic face a unique dilemma — what to do with their soon-to-be expired vehicle leases.

J.D. Power estimates that from March to July, 1.8 million lease customers are scheduled to turn in their keys. For U.S. dealerships this usually is a reliable source of return customers. But this spring, it's unlikely dealerships will be able to take advantage of those expiring contracts and put customers into a new vehicle because some states are banning auto sales.

Because of this, thousands of customers will continue their leases, availing themselves of generous automaker-backed extensions. Others will drop cars off at dealerships without replacing them perhaps because they are working from home and don't need a vehicle or they have lost their job and don't have the need or money for a new one.

In either case, dealerships that might have been able to sell to off-lease customers during the COVID-19 crisis likely will miss out.

"Dealers are, like, this is my one opportunity and I'm not going to get it," Jessica Caldwell, executive director of industry analysis at Edmunds, told Automotive News. "It's tough from a dealership standpoint."

Record job losses and mandatory store closures have dried up vehicle demand across the U.S. in a matter of weeks. Nearly 10 million Americans filed for unemployment in March, a historic figure that spells trouble for vehicle ownership.

For dealerships operating in states where sales don't constitute an essential service, off-lease vehicles are little more than an inventory burden. Some dealerships report customers dropping off-lease cars in service drives and seeking replacements in neighboring states that still allow sales.

How long lease ownership is protracted will vary by brand. Clogged call centers prompted many automaker lenders and captive-like partners to automatically extend leases, allowing customers to terminate contracts if they choose. Many captives, such as General Motors' and Nissan's, are offering lease extensions one month at a time. Chase Auto will extend leases by up to six months.

Mark LaNeve, Ford Motor Co. vice president of U.S. marketing, sales and service, said Ford Credit has been granting lease customers extensions "by the thousands."

"We've been able to accommodate the lease return, plus if a customer just wants to sit home and extend, they just call Ford Credit," LaNeve said. Almost all of Ford's 3,000 U.S. dealerships have the ability to accept vehicle returns, he said.

Retaining lease customers will be critical for dealerships and lenders as the economy tanks, J.D. Power said. Leasing levels fell materially in March, mostly from consumers postponing purchases and sales declines in high-lease markets. Carmakers also have instituted new incentive programs such as 0 percent financing and deferring payments up to 120 days on extended-term loans, further cooling interest in leasing.

Nearly 340,000 consumers will need to replace a vehicle each month in 2020, Cox Automotive says. Caldwell doesn't believe those vehicles will come back to dealerships as anticipated, but that doesn't mean inventory will vanish.

"The constraint of the process, not being able to service these customers, is one issue. But if you push these leases back, one month, three months — the question is, how long will this deferred demand take to come back to the market?" she said.

Auto lenders typically fare well in a downturn because most consumers rely on their vehicles to get to and from jobs. Of all credit products, auto loans and leases are among the least likely to experience defaults in such a situation.

Dealerships remain optimistic that when the worst is over, customers will return. Extending leases offers protection for customers of dealerships hamstrung by sales moratoriums, and dealers say they are grateful their customers will be taken care of in the interim.

Jim Seavitt, owner of Village Ford in Dearborn, Mich., says his store leases between 60 and 70 new vehicles a month, three-quarters of his total new-vehicle sales. A dealership representative has been calling customers whose leases are up to let them know they can extend their contracts, he said.

"Those people are just being told to hang on to their vehicles," he said. "We're handcuffed right now."

John Rickards, president of Bobby Rahal Automotive Group in Pennsylvania, said customers who have the opportunity to extend their leases are doing so. For those that cannot, "They're coming and dropping off the car in the service drive," Rickards said.

Bobby Rahal's Honda location leases approximately 540 vehicles a year, about 30 percent of its total 1,800 new vehicles, he added.

While Pennsylvania's stay-at-home order prohibits retail vehicle sales, surrounding states such as Maryland and New York face no such restrictions for remote deliveries, Rickards said, which is pushing off-lease customers to seek options across state lines.

"We cannot offer them any other transportation at this point," he said. "They need to get to the grocery stores, and our hands are tied."

West Coast dealer Jason Courter said he has heard rumors of customers seeking vehicles out of state. While under stay-at-home, no-sales orders, Bellevue Honda, in Washington, has been directing customers to Honda's help line, where they can extend the leases. The store typically leases between 20 to 30 vehicles a month.

"If someone needed a car — customers are very resourceful," he said.

Michael Martinez contributed to this report.