By Mike Antich
Resale values for five-year old medium-duty trucks (Classes 3-7) have decreased, on average, between 18-23 percent in the past 12 months. "There have been significant declines across the board on all medium-duty trucks. This includes 1-3-year old trucks, as well as 7-10 year old trucks," said Mark Orth, national remarketing manager - truck & specialty assets for GE Capital Solutions Fleet Services. "In particular, trucks older than 10 years old are very difficult to sell. These units are older technology, have higher fuel and maintenance costs, and currently have very little demand."
The ongoing sluggish business environment is the key reason for the soft resale market.
"There is an over-abundance of used units due to small businesses not needing as many of these trucks because of the slowdown in construction, delivery applications, and landscaping," said Ricky Beggs, VP and managing editor of Black Book. This slowdown has caused wholesale inventory of used medium-duties to remain higher than buyer demand. For instance, there is currently a glut of box trucks in the wholesale market. Contributing to the increased supply of used medium-duties has been an uptick in early lease terminations and repos caused by numerous business failures. In addition, the secondary tradesmen market, a key buying segment for used medium-duties, has dried up due to the downturn in new construction. This, in turn, has had a cascading effect to other related industries, also traditional buyers of used medium-duties, such as appliance merchandisers, furniture stores, and carpet retailers. "Over the past 12 months, the medium-duty trucks were among the hardest hit in terms of resale values," said Jane Morgan, president, Specialty Sales Division for ADESA Corp., a nationwide auction chain.
Resale Values in the Doldrums since Late 2007
Although the wholesale market for light-duty trucks remains stable, the medium-duty market is a separate resale market, influenced by different market variables and catering to distinct buyers. "Many people refer to the two markets as the same, but they are two totally distinct markets," said Beggs.
The decline in medium-duty resale values began in late 2007, when the residential construction slowdown started. In 2007, resale values declined 10 percent and remained that way through the first half of 2008. Then a combination of market forces, starting last July, converged to create a "perfect storm" to further drive down resale values by 15-25 percent. These convergent forces were higher fuel prices, tighter consumer credit, and the stagnant construction market. As a result, the pool of buyers (hence market demand) for used trucks contracted, putting downward pressure on resale prices. This soft resale market has persisted into today.
"Since February, prices for some 2007 cabover trucks are down about $2,803. These are the types of trucks used by construction workers, landscapers, and for in-city delivery companies," said Josh Giles, light-duty & medium-duty truck editor for Black Book. "For instance, a 2007 NPR declined from $16,800 to $13,800 in less than four months." The oversupply of medium-duties is causing prices to remain soft. "This is pretty much tied to home building. We see the market staying down for the rest of the year. There are too few buyers for a large number of sellers," said Charles Cathey, heavy-duty truck editor for Black Book.
Another factor influencing medium-duty truck resale is the number of retail dealers who have gone out of business. New and used inventory from closed dealerships is being consigned to auctions. In addition, the growing number of dealerships closing may potentially affect the buyer pool by decreasing the universe of medium-duty truck dealers going to auction. Compounding these problems is the extremely slow new-truck market. Sales are so slow that many dealers still have some brand-new pre-2007 emission standard models sitting on their lots. The sluggish new-truck market is prompting significant price discounting on new models, putting downward pressure on used-vehicle prices. In some instances, aggressively discounted new trucks are competing with the late-model used trucks. However, in the past several months, resale values for medium-duties have rebounded a bit, said Morgan. She attributes the upturn to the onset of summer, which increases demand for these types of trucks in the lawn care and construction markets. "Because this market has been so depressed, fleets have held onto their trucks/equipment longer. This equipment has to be replaced because it is worn out," said Morgan.
A Possible Silver Lining
Medium-duty truck sales are somewhat soft in the marketplace today, with stable prices and demand, but no signs of growth yet, according to Dave Nagy, senior vice president of fleet assets for Emkay. "The impact of the government stimulus programs has not yet trickled down to this segment. As the economy improves, we look for firmer pricing in this segment."
While selection of the auction that markets well to the medium duty-buying base is a factor in driving resale values, mileage seems to have the biggest impact on prices, with 80,000-100,000 miles as the preferred mileage.
"Condition is important only to the extent that there is no major collision damage; cosmetic damage does not seem to have a significant impact on the value of this class currently," said Nagy. "Like passenger vehicles, the wholesale market seems to only have interest on vehicles that fills an immediate need. Wholesalers are not purchasing for the future, like they did last summer when fuel prices crossed $4/gallon. Inventory stockpiling may return if summer fuel prices continue to rise and the general economic conditions improve."
The forecast is for medium-duty resale values to remain soft at current price levels. "We expect the resale values for medium-duty trucks staying right about where they are for a while. We don't expect prices to come up," said Black Book's Cathey. Everyone agrees that medium-duty truck resale values will only strengthen when there is a rebound in the new-construction market. Many used-truck buyers in the construction market are deferring purchases until a turnaround occurs.
One possible silver lining for the future is that the current decreased volume of new medium-duty truck sales may result in a shortage of used trucks two or three years from now. A decrease in supply has traditionally put upward pressure on resale prices.
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