What Terms to Understand Within the Hotel Sector

The hotel industry is bouncing back from record-low activity in 2020. With a steady flow of revenge travel, hospitality’s resilience remains unmatched. Consumers may shift budgets as talk of a 2023 recession continues; however, others will continue to prioritize leisure travel, making hospitality an excellent 2023 pick for investors. As each market is experiencing different hospitality trends, it’s essential for investors to research which assets best fit long-term investment goals.

Two prevalent concepts in the hotel industry are third-party management and flagged hotels. The process through which companies monitor and manage interactions with all external parties is known as third-party management. Third-party management allows owners to still be involved in their assets while allowing an external source to operate the hotel, allowing experts to engage in management, HR, and advertising to increase the landlord’s topline revenue and bottom-line NOI. A third-party manager’s primary goal is to increase the value and profitability of the hotel.

A hotel flag is an informal phrase for a brand that operates within the hotel industry. When a hotel has an approved flag, it allows it to use that brand’s trademark, name, and logo and is automatically associated with the overall company’s image. Examples of flagged hotels include Marriot, Best Western, and Hilton.

There are more than 700 flagged hotels in the United States. Examples of flagged hotels include Marriott, Best Western, and Hilton.

Fundamentals of Third-Party Management

A third-party hotel manager oversees the daily operations on behalf of a hotel owner or investor. The services offered are highly varied and can be customized to the owner’s demands. A significant benefit of third-party hotel management includes procurement and access to preferred supplier relationships to lower costs, HR, hiring, and advertising. Outside management also offers extra attention, a hands-on approach, alignment with the owner’s objectives, and the owner’s multi-brand experience. Established and trusted brands can implement high-conversion tactics, creating websites from scratch, managing and reporting on online reputations, and offering platforms to help visitors book rooms. They can upgrade any hotel brand, regardless of size or class level.

Hotel guests are more critical than ever of the decor, amenities, food, beverage options, and technology offered by the world’s largest hotel brands—making third-party management even more of a necessity compared to earlier years. Outside management can provide modern fixtures, linens, technology, and more to upgrade the hotel brand and stay consistent with consumer demands.

Owners pay third-party fees for various services to manage and market their properties efficiently. Most fee payments, ranging from two to four percent, correspond with hotel revenue.

Third-party management is an excellent way to mitigate risk and increase customer satisfaction.

The correct third-party management can protect hotels from supply chain issues and reputational harm. Beyond making expenditures on upkeep, new fixtures, and furnishings, third-party management firms will oversee guest experience improvement by continuously hosting service trainings for staff. Additionally, according to the J.D. Power 2022 North America Third-Party Hotel Management Satisfaction Benchmark, when hotel staff make guests feel valued, overall satisfaction scores are 139 points higher (on a 1,000-point scale). When staff shows concern for guests’ needs and provides sincere solutions, satisfaction scores rise by 135 points.

Optimizing Third-Party Management

Optimizing third-party management is made simple by working with a professional agent with hyper-specialization in a specific region. A trained agent will recommend the best firm aligned with the investor’s goals.

De-flagging in Today’s Economy

De-flagging is a streamlined restructuring in which a company decides to operate as a distinct, independent unit while removing its brand identification. Heavily contributed to recent economic times, some large hotels are choosing to go independent to bring a unique customer experience and to stand out in a competitive market. De-flagging allows hotels to let go of the limits of a brand and make a name for themselves.

The most common reasons for a hotel to de-flag include the following:

• Economic slowdown.
• The desire for more creative freedom (AKA revenue-producing opportunities).
• The associated brand is losing its positive reputation or competitive advantage.
• New birth and independence.

Two well-known hotels that have recently de-flagged include The Trump SoHo in Manhattan, which was recently renewed as The Dominick, and The DeSoto in Savannah, GA, which used to fly by the Hilton flag.