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February 24, 2020

Hotel companies are increasingly shifting to an asset-light strategy as they expand.

The last decade has seen a continued shift in hotel ownership. In 2010, roughly 70 percent of branded hotels were franchised operations. By 2019, that figure rose to roughly 80 percent.

More companies are continuing to move away from owning the real estate portion of properties and toward the franchise model, allowing them to benefit from a consistent revenue stream while in expansion mode, says Geraldine Guichardo, Global Head of Research, Hotels & Hospitality Group, JLL.

“The growth of the franchise model is facilitated by the fact that Wall Street rewards parent hotel companies that have a more asset-light strategy, as they typically boast strong balance sheets since they have less leverage, Guichardo says. “These companies no longer need to take on debt to buy hotels, which is rewarded with higher stock prices.”

Major hotel brands have led the change in strategy. Marriott International, Hilton Worldwide, Wyndham Hotels & Resorts, Choice Hotels International and Intercontinental Hotels Group — the top 5 franchisors by total room count in the U.S. — collectively represent 82 percent of total franchised branded rooms, according to STR and JLL Research.

Focusing on strengths
The high concentration of franchised hotels is a departure from the prevailing state of the industry in the 1980s, when major hotel companies would take on significant debt in order to purchase or develop hotels. When they subsequently sold those assets, they would reach an agreement with the new owners to allow them to continue leveraging the brand name.

The economic recession in the 1990s, however, brought a shift. Hotel companies were not able to sell properties in an illiquid market. Companies that transitioned into a more asset-light strategy found themselves in a stronger position, says Guichardo.

“Having little to no real estate debt on their books meant that as franchisors, firms like Marriott International could more easily grow across several markets, expanding their reach without necessarily making significant capital outlays. This in turn resulted in brands becoming more ubiquitous and recognizable.”

It also allowed franchisors to focus on their strengths.

“Growing their franchise business allowed major hotel companies to focus on operating hotels, which is what they are inherently good at and what their business was first created to do,” says Guichardo.

Benefits for brands and franchisees

Given that hotel development is a capital-intensive business, flagship brands are keener than ever to license out their name to an existing property, or to seek investment from outside companies to develop properties.

In doing so, they receive a percentage of revenue from the franchisee and are able to avoid hefty up-front costs. They are also able to tap into their partners’ familiarity with local market dynamics, which is especially important when a brand is expanding its geographic footprint to new regions, says Guichardo.

Franchisees also help brands adopt to travelers’ changing preferences. For example, hotel guests are increasingly seeking out unique, local experiences. A Hilton Garden Inn in New York recently introduced a hip rooftop bar, The Attic, a considerable perk for a select service hotel known for limited food and beverage options beyond grab-and-go kiosks.

“Most select service hotels have simple amenities,” says Guichardo. “But we’ve started seeing features of an evolved select service product in markets where it makes sense — Austin, Nashville, New York. These are cities where a franchise owner might need to differentiate the product in view of competition from independent brands that are not affiliated with any major hotel group.”

There are perks, too, for franchisees, who get to own a property with brand recognition, receive key money and have access to global reservation systems and loyalty programs.

“Franchisors also offer programs for new owners to learn the business of operating a hotel,” says Guichardo. “There are a lot of good reasons to become a franchise owner, particularly having the backing of a huge parent company, leadership training and technical support. It brings a lot of value to the table.”

Click to read about how global real estate investment hit a record high in 2019.

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Geraldine Guichardo

Global Head of Research, Hotels & Hospitality Group, JLL.

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