Franchise Systems with different amounts of coins

By Laura Pratt

As COVID and the devastation it wreacked on the hospitality sector recedes into the rearview, the windshield lights up with promise for franchised hotels. A combination of factors plays into the scene, including an anticipation of construction costs and financing rates dropping, a renewed appetite for conversions, and a fresh interest in extended-stay properties and dual branding. 

Throughout 2023 — “an important year of growth for Hyatt across Canada” — says Paul Daly, global head of Franchise & Owner Relations at Hyatt, the franchise hotel picture in Canada was “relatively robust and brands remained in demand.” He says Hyatt is positioned to double its brand footprint in Canada by the end of 2026, with more than 20 executed managed and franchised agreements across its distinct brands. 

It’s a growth story that’s being told across much of the franchised hotel scene right now. “In Canada, we have lower GDP growth compared to the U.S., which would normally put downward pressure on room demand, as the two are linked,” says Brian Leon, CEO of Choice Hotels Canada. “But what we’re seeing now is that as much as Canadians are starting to clamp down on expenses; they’re not cutting down on travel.” 

Scott T. Duff, vice-president, Development – Canada, with IHG Hotels & Resorts, agrees, saying franchised hotels’ occupancy and average rates are significantly higher across the country than they’ve been for a long stretch, a development he credits to “revenge travel,” demographics (Boomers settling into their retirement years with road trips and younger generations prioritizing travel experiences), and consumers’ COVID-sprung pent-up demand. 

Franchised hotels, which are generally owner operated, are typically more agile and responsive to this kind of change than managed hotels, which tend to be larger full-service or luxury properties, says Duff. 

Andrea Grigg, global head of Hotel Asset Management at CBRE, credits COVID with uncovering an important home truth about franchised hotels. “When everyone was assessing the viability of staying open in the pandemic, an owner of a brand-managed property had little control over the decision; they had to wait for the operator to make it while losing money every day. During COVID, owners realized how much oversight was required to ensure maximum profitability at hotels. 

“The efficiency you can achieve by taking control of the operating model has become paramount in the current environment,” she says. “Hotel owners are now entertaining the franchising model even more than before COVID.”

In the Canadian market, says Daly, there’s been a shift from independently operated hotels toward franchised hotels over the last decade or so. “Just like in any market, the franchise model gives owners a strong sense of confidence when they’re stepping into a new market to have the backing of a well-known brand, especially if it’s a market they’re not currently in or don’t know very well.”

Franchised hotels allow owners to have control of not only the hotel as a real-estate asset, but also its operation, Aaron Laurie, vice-president, Lodging Development, at Marriott International, notes. And owners lacking experience can have Marriott or a third-party management team operate it on their behalf, or enrol in a training program. 

More than that, franchised hotels offer owners the power of the big engine that roars inside the central systems, which, says Duff, “have become increasingly powerful and are extremely large drivers of this demand into these hotels.” 

Enter “soft branding”— another emerging segment. Distinct from “hard branding,” where a giant sign trumpets the moniker of a long-entrenched hotel brand, in soft branding, an independent hotel asset joins forces with a larger management system so it might benefit from its branded systems around loyalty and reservations. 

“Soft branding is an opportunity for [a hotel] to elevate and differentiate its asset from the pack,” Duff says. 

Grigg believes “savvy owners will continue to explore franchising models and affiliation models over brand-managed models and that the industry will look at soft branding franchises as an idea to keep as much possible control over the business and operating model.” 

Extended-stay hotels, where rooms feature onsite kitchens, are also gaining traction in this new landscape — for travellers and developers alike. Duff cites the trend of dual branding, where two franchised concepts — one an extended stay — share a location, as a site of particular growth. IHG, which has 190 franchised hotels in Canada, has been expanding its portfolio across its Suites Collection to capitalize on this development; the company added three regional extended-stay openings in 2023 and has 16 more in its pipeline. 

“Extended stay is really popular in terms of what deals are being signed,” says Nicole Nguyen, senior vice-president with CBRE Hotels. “That, plus lifestyle boutique properties make up the hottest deals these days.” 

Marriott’s Laurie concurs that longer-stay visits are on the climb in the post-pandemic universe, thanks to travellers’ increasingly flexible work-leisure situations and an upped demand for larger-group travel. 

Much of this development, including Apartments by Marriott Bonvoy, opened in 2023, is taking place in the conversion realm, rather than new builds, because of the rising cost of materials and labour.

“Brands have recognized that their growth can’t come from new builds because market cycles make it hard to make new builds work,” Nguyen says. “And in Canada, there are only so many markets where you can keep building new product.” 

Laurie also points to a spike in conversions as an antidote to the economics that continue to challenge a lot of Marriott’s franchisees. “Conversions reduce their risk of entering high-barrier-to-entry markets,” he says, “because they allow them to re-position their hotel and plug into Marriott.”

At Marriott, which has 273 hotels in Canada, a majority of the existing portfolio is franchised hotels, with ownership partners not only owning the real estate but operating the hotel. Another uptick, Laurie says, is in mixed-use development, such as the Humaniti Hotel in Montreal, which again favours hoteliers without experience and allows developers to diversify into other forms of real-estate assets.

Mixed use is very popular, Nguyen confirms, with 98 per cent of that category happening in major urban core centres.

Marriott, says Laurie, doesn’t manage its upper-midscale brands unless they’re large hotels in urban centres or resort locations, and otherwise relies heavily on owner-operators who need a measure of flexibility for their margins at their limited- or select-service properties, which tend to require less staffing and come with less hotel-management expertise. “Overall, it’s a healthy community right now, given the market, and performance is strong.”

Last year, says Choice’s Leon, was exceptionally impressive from the standpoint of hotel performance. “It far surpassed our expectations for overall RevPAR growth, given the strong recovery we’d already had in 2022.” This bump, he says, has been great for hotels generally and he says the resilience of the industry elevates “the attractiveness of hotels as a high-performing investment vehicle,” adding that, while financing and construction costs remain a challenge, “the overall fundamentals are strong. 

“The prospects for the industry are excellent and we’re very optimistic. The landscape is healthy, and the outlook is exceptionally bright. We have record levels of hotel performance and there’s lots of interest in getting into the hotel business. The value a good franchise system can bring to hotels is more relevant today than ever,” Leon says. 

There’s a lot that’s unknown and outside our control in the world today, IHG’s Duff says, whether it be geopolitical, environmental, or economic. “But there’s a general degree of optimism. You’re hearing that interest rates are going to level off and even start to recede in ’24. That bodes well for new developments and relieving pressure on household finances to allow people to continue to travel. And the growth story in Canada is going to be more the franchised model than the brand-managed model.” 


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