Adapting to a New Normal in the Automotive Industry
Over the last two years, the used car industry has seen a surge in demand, resulting in positive market performance. As the COVID-19 pandemic disrupted the global supply chain, new car production was impacted, and consumers turned to the used car market to meet their purchasing needs. This created an opportunity for used car dealerships to capitalize on the increased demand. However, after several quarters of positive demand, the tides are shifting, supply is returning, prices are slowly falling, and rising interest rates are negatively impacting the market.
State of Market
Overall, the commercial real estate market has shown signs of recovery in Q1 2023 as the economy continues to rebound from the impact of the COVID-19 pandemic.
However, interest rates have been on the rise in recent months, which has had several effects on the automotive industry, especially on the used auto market. One of the most significant impacts of high-interest rates is that they have made it more difficult for consumers to justify discretionary purchases like a vehicle. With higher interest rates, monthly car payments become more expensive, which can put a strain on many buyers’ budgets. This has led to a slowdown in sales at many used auto dealerships as buyers become more cautious and hesitant to take on large car loans. Recently, three large dealership chains went belly up due to these economic factors, two of which included USAuto Sales and American Car Center. The market is currently sitting at the highest auto loan delinquency rate since the Great Financial Crisis. Many dealerships are laying off staff and condensing their real estate footprint to keep businesses running through this tough time.
Market Outlook – Rising and Falling Prices
According to a report by Cox Automotive, used car sales in the U.S. decreased 2.7 percent from March 2023 in the first 15 days of April. The mid-month Manheim Used Vehicle Index decreased to 231.7 out of 300, down four percent year-over-year from April 2022.
A report by CNN stated, due to the pandemic and the subsequent interruptions in new car supply chains, used car prices experienced a significant increase, with a record breaking 45 percent rise in the 12 months leading up to June 2021, according to the Consumer Price Index. However, in the latest reading for December 2022, there was a 12-month decline of 8.8 percent, representing a significant swing in the opposite direction.
Edmunds’ data indicates that the average price of a used car purchase in December 2022 was $29,533, a decrease of nearly $1,600 from the peak price of $31,095 in April 2022. Currently, the average price of a used car is like the average price of a new car in 2010, which was $29,217, according to a report done by Detroit Free Press.
Total used sales for 2023 are forecast by Cox Automotive to be $36.2 million, nearly compared to 2022.
Leading Reasons for Dropping Prices
While prices for late model used cars have only dropped by five percent since their peak, Edmunds reports that prices for used cars five years or older have dropped by 15 percent or more since their early 2022 peaks. Higher interest rates, which make financing a car purchase more expensive and reduce demand, are to blame for the fall.
Automakers are reporting an increase in the availability of the computer chips they need, and as a result, they are producing and selling more cars. According to Cox Automotive, sales in Q4 2022 were nine percent higher compared to the same period a year ago and nearly six percent higher than in Q3 2022. As more buyers can purchase the new cars they desire, the demand for used vehicles is reduced.
Work-From-Home Poses a Threat to the Industry
Changing consumer behavior is a significant challenge in this post-pandemic era. As the pandemic led to a shift towards remote work and online shopping, many consumers are now more comfortable making large online purchases. This has led to increased competition from online used car marketplaces, which can offer a wider selection of vehicles and lower prices.
Additionally, an increase in people working from home can negatively impact the used car industry because it reduces the demand for commuting, which is one of the main reasons people purchase cars. As a result, some people who would have bought a car before the pandemic may choose not to or delay their purchase until they have a clearer idea of their future commuting needs. This drop in demand may cause used car prices to fall even lower.
Navigating Volatile Times
As we continue to navigate the challenges of a rapidly changing commercial real estate market, it’s more important than ever to have experienced advisors on your side. In this environment, the right guidance and support can make all the difference in helping you make informed decisions, mitigate risk, and identify new opportunities for growth and success.
At Matthews™, we have high-specialized agents, including auto dealership specialists, that take pride in having a thorough understanding of the market for these assets, how dealerships function, and how the changing economy’s high-interest rates affect profitability and, thus, security around this investment product. We understand the challenges that businesses and investors face in this environment, from navigating the complexities of leasing to evaluating new investment opportunities and assessing market trends.
Takeaways
Despite falling prices, by improving their online presence, optimizing their pricing strategy, and finding innovative ways to source inventory, used car dealerships can position themselves for continued success in the future.
