The hotel management business is fundamentally changing, according to Euan McGlashan, co-founder and managing partner of Valor Hospitality Partners. It’s more common today for management companies like Valor to align themselves with large equity group that are actively buying, selling, and rebuilding. “That’s really how we’ve seen the growth in our business and how we’re going to continue to grow,” McGlashan says. Here are some other shifts in the business he has seen recently that will continue into 2017.
Management companies have become full-service platforms. “There’s this shift where management companies can’t be one-dimensional anymore and just be management companies. I think companies are realizing this shift exists and that if they really want to play in that space they’re going to have to become a lot more skilled in different elements of the overall business.”
Larger management companies have started raising their own funds. “They’ve realized that to grow their businesses and get management contracts, they need to be on the purchase/buy side.”
Foreign investment in management companies is increasing. “You’ve got the big, big management companies that are now ripe for foreign investment because an operating platform of that size is generating so much revenue, making it a desirable purchase.”
The average length of contract has changed dramatically. “Fifteen to 20 years ago, management contracts were 20-plus years. They almost ran in total alignment to the franchise agreement, license agreement, or the brand. Today, management contracts typically could be three, five, seven years, and run more aligned to the whole period of the equity that’s buying. I’ve also found that even management companies’ termination language has become a lot softer.”
Hotels for sale are unencumbered by management. “Management agreements are now written in such a way that when the ownership decide to sell, they want to sell unencumbered of management. Termination language has also changed dramatically over the years. Today, it’s more likely to be 30 days, or—at the most—three months. There’s very little of the old year, two, or three of fees.”
Consolidation is likely to continue. “You’re probably going to see some mergers—larger management companies buying or consuming smaller management companies to make themselves more efficient—given that the costs to run a management company often rise at a higher rate than the fees, which tend to stay static as a percentage.”
