Carsharing catches on with Millennials

March 12, 2013, 5:07 PM UTC

FORTUNE — When RelayRides CEO Andre Haddad isn’t using his 2006 Porsche 911, he encourages strangers to drive it.

This willingness to share — even something as valuable as a sports car — is the premise behind carsharing, a growing industry that connects car owners with renters seeking out a temporary set of wheels. What started with Zipcar’s community car fleets in 2000 has expanded to include individual owners making their cars available to strangers over the internet. Carsharing, as a result, is threatening the long-entrenched structure of auto ownership.

The so-called sharing economy — people rent out spare bedrooms (AirBnB), under-utilized conference rooms (LiquidSpace), and even their free labor (TaskRabbit) — has grown substantially in just a few years. But the transportation industry has seen the greatest change. A 2012 study by Lacey Plache, chief economist at, found that young adults aged 18-34 purchased 30% fewer cars in 2011 than they did in 2007. Now, carsharing may be a leading indicator for a much broader set of services.

Carsharing proponents argue that, for those who own vehicles, renting them out to strangers through services like RelayRides or FlightCar can defray car payments considerably (sometimes altogether). For renters, paying for a car only when it is actually needed can be much less expensive ownership, particularly in big cities. Carsharing — along with a revamped take on carpooling, dubbed ridesharing — has gotten a jolt from smartphone-wielding millennials in need of a ride. “For a long time the [car] was the symbol of freedom, the symbol of adulthood,” says Haddad of RelayRides. “That’s apparently been shaken up in a lot of younger people’s minds.”

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How’s it work? San Francisco-based FlightCar allows car owners to rent out their wheels while traveling. Users park at the airport, for instance, and let another traveler use their cars until they return. Ridesharing services like SideCar and Lyft, both headquartered in San Francisco, connect ride-seekers with local drivers who use their own cars to taxi people around; they require only an app to operate. Thanks to smartphone technology, even traditional taxi and limo services are working to get in on the action. Flywheel and Uber help passengers hail taxis or limo-type rides using GPS to find the closest possible driver.

Such services have been largely fueled by a growing number of American urbanites. In 2010, more than 80% of the U.S. population lived in urban areas compared to only 73% in 1980, according to census data. Cities provide car owners with financial challenges like higher gas prices, insurance, and difficult to find or expensive parking. These higher ownership costs have kept teenagers from rushing to the DMV. Roughly half of all 16-year-olds had their driver’s license in 1978. By 2008, that figure fell to 31%; in 2010, it was down to 28%. For people who need cars only sparingly, renting from a neighbor is sufficient. For those without a license, bumming a ride has become easier. “We are moving from a product-oriented economy to a services-oriented economy,” says Sunil Paul, CEO of SideCar. “We are going to turn transportation from a product (buy a car), to a service (download this app).”

Carsharing and ridesharing platforms have stepped in to fill the void. SideCar drivers had completed 10,000 rides in July of 2012; by December that figure rose to 100,000. RelayRides has cars for rent in more than 1,200 cities across the country, all of them added since last year. Flywheel’s taxi hailing software is in 3,000 taxis across the country, and will soon expand into New York City when vendors begin using “e-hail” technology, possibly at the end of March. Zipcar has more than 760,000 members and was acquired by Avis for $500 million in January.

Of course, this stream of carsharing and ridesharing services that cropped up during the recession is also competing with a rejuvenated auto industry — U.S. car sales were up 13% in 2012 over 2011. All three major U.S. automakers showed improved sales led by Chrysler’s 21% jump last year. And sharing economy proponents aren’t the only ones who have been trying to make car ownership cheaper the last few years — during the recession, car dealerships worked hard to stifle ownership fears by offering customers lower interest rates on car loans than the banks.

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Ridesharing is also testing the bounds set up by state law. Last fall, the California Public Utilities Commission (CPUC) levied $20,000 fines against Uber, SideCar, and Zimride, which operates the Lyft app. The CPUC issued a cease and desist to both SideCar and Lyft around the same time; Uber received its cease and desist letter in 2010. In October, Uber pulled out of New York City, citing “roadblocks” from the city’s Taxi and Limousine Commission (TLC). (The city approved “e-hail” apps in December, but the TLC is now being sued by Livery car groups in an attempt to stop the e-hail program, which could start this month.) In California, the CPUC fines for Lyft and Uber were suspended in January as the state began an “interim rulemaking period” to determine how best to approach this new avenue of transportation. The agreement specified that ridesharing was also temporarily legal. In a blog post, Uber, which currently only matches up passengers with commercially licensed taxi or town car drivers, announced intentions to join Lyft and SideCar in the ridesharing business.

According to Paul, taxi operators provide the majority of complaints to the state regarding competitor ridesharing services, and other established transportation players will soon take notice of these carsharing and ridesharing platforms if they haven’t already. Avis (CAR) showed signs of adaptation when it purchased Zipcar, a carsharing veteran at just over a decade old, at the beginning of the year. RelayRides hasn’t made contact with any rental services to date, says Haddad, but has gotten support from one major automaker: General Motors (GM). GM Ventures, the corporation’s investment arm, is a financial backer.

Different sharing communities have begun to carve out their respective roles in the modern transportation landscape, and it appears as if there is room for everybody — for now. “What we need to be focused on as vendors,” says Humphreys, “is getting consumers around, getting them to not want to own a car, and getting them all the alternatives they want to get their hired rides.”

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