Branded hotels comprise an increasingly large portion of global hotel supply, with nearly 50 percent of them managed by third parties, according JLL. However, the third-party management space remains extremely fragmented, with the largest companies controlling less than 3 percent of that inventory.
As such, JLL said to look for increased M&A to unfold akin to Stonebridge’s $60 million acquisition of Real Hospitality group last year. According to STR Census and JLL Research from October, 56.9 percent of global hotel inventory was branded. Of those 12.6 million rooms, 46.9 percent (5.9 million rooms) are franchised (i.e., managed by a third-party as opposed to the brand itself). Of those 5.9 million rooms, no single operator manages more than 3 percent in total.
JLL said the portion of global hotel rooms that are branded has increased 360bps over the past 10 years as they offer access to a wider customer base via better distribution and vast loyalty networks. Marriott currently leads the way with just under 1.6 million rooms globally, followed by Hilton (1.2 million), and IHG (900,000).
Hotel brands have increasingly turned to third parties such as Aimbridge, Highgate and Pyramid to manage their properties to help mitigate risk and lower corporate expenses while continuing to drive high fees. JLL said it expects franchised hotels to comprise a larger share of the branded hotel universe in the coming years.
Historically the third-party management space has been dominated by owner-operators who would become third-party players as they sold assets and kept the contracts, said Jeff Altman, senior managing director on JLL's M&A and Corporate Advisory platform. But there has recently been a movement towards creating much more professional and profitable organizations, led by private equity.
“In the last few years, there's been a real slow down in the asset-level transaction environments. Those environments are the biggest source of incremental contract growth, particularly when there's not a lot of new development,” Altman said. “With the expectation of materially more transaction volume, it’s going to create a lot of winners and losers … because most of these contracts in third-party space are terminable on sale.”
Altman believes hotel performance has restabilized, post-Covid. “Some of the drive-to markets have pulled back while some of the urban markets have recovered so you’re in a more normalized environment.”
This normalization signals a shift towards a more balanced environment.
“We are seeing a greater material expansion of the third-party managers’ TAM [total addressable market],” Altman said. “It is coming directly from a greater openness and willingness from the owners wanting it. Secondarily, the brands, who are performing very well, but are clamoring to continue their growth rates in an environment where the underlying industry hasn’t grown that much.”
Hotel brands like Hilton and Marriott, which have experienced rapid growth, are having to become more flexible in their ways to grow, Altman said.
“Most of the third-party managers that we spend time with, tend to migrate in larger assets—major, urban, resort, full-service assets,” he continued. “There are some groups that focus on select service but when you look at some of the challenges Ambridge and others have had, it shows that these companies are not meant to grow in perpetuity. There are just some assets that are better operated by more entrepreneurial folks.”
“Like all great things, when you grow there is a tension between size and efficiencies and entrepreneurship. As the brands allow more upscale, maybe even luxury hotels, to be third-party managed, that’s a huge TAM increase for the existing players.”
For example, around 89 percent of rooms in upscale hotels are third-party managed but the figures drop significantly up the chain scale with upper-upscale at 70 percent and luxury as low as 12 percent, Altman advised. Independent properties, and only for high-quality assets, is as low as 10 percent.