Hospitality & Restaurant Industry Dynamics and Their Impact on CRE

Things were much more forthright in the hotel industry 50 years ago but in more recent years, due to major unforeseen changes industry-wide in overall ownership and operations structures, hotel property owners have a less straight-forward choice of how to manage their investment since they often no longer personally manage their own properties. In a case where the property owner does in fact run the day-to-day operations, the ownership calls all the shots and holds all the power, as well as all the HR and fiscal responsibilities.

However, bearing in mind each investors’ risk vs. reward tolerance level and rising costs due to inflation and other outside factors and market influencers, there have become more and more options as to how a hotel’s financial and operational management breakdown can be structured.

There are two major categories you can choose from should you opt not to personally own and operate your hotel. The alternatives are an owner leasing the hotel to another company under a landlord/tenant relationship structure or the owner can partner with a hotel/hospitality management company to operate the property under branding contracts.

When using a hospitality management company, the decision must be made on whether to run as an independent hotel concept or to run as a flagship hotel with a recognizable brand such as Marriott or Hilton, or even smaller local brand such as The Goodtime Hotel by Groot Hospitality (David Grutman). Deciding to move into the branded field again breaks down even further when having to deciding to either franchise the hotel or have the branded company run and manage the property as a corporate location. Bear in mind, 90% of the time when you see a Hilton logo that hotel is not owned by Hilton, it is most likely owned by a real estate investment company that pays Hilton for its name and the marketing, training and operating systems that come along with it.

The deeper into the operations of the hotel you dive, the more complex these branding and management contract relationships can be. When making these decisions, the hotel owner should always consider the long-term goals for the property and how that translates into the contracts and the overall operations costs. Franchise fees and the rules & regulations governing their locations can vary greatly from brand-to-brand and a property managed directly by the brand can have several layers of contracts involved, however as in the case of Hilton, Hilton Managed properties have far more tools and insights than Hilton offers to a franchised property, and this should be considered when projecting for the extended success of your project.

On the downside, the hotel owner gives up a great deal of power and control over the property when choosing to go with the one of the various options that do not include self-operating. Brand standards are strict and costly, management contracts tend to restrict an owner’s voice and authority over the hotel while a leased property completely removes the owner from having any say in the operation of the hotel at all. On the other hand, going independent is an often costly and risky proposition leaving the ownership to decide everything from operations and IT systems, to staffing, marketing and facilities maintenance, and if you are not experienced in hospitality, it can be a formidable and precarious undertaking.