Starwood Hotels & Resorts’ new upscale extended-stay brand, element, debuted last month in Lexington, Massachusetts. Developers seem to like the niche

Says Choice Hotels International’s David Pepper, senior vice president of franchise development and emerging business, “We’re still 15% ahead of last year in new construction projects. The slowing hasn’t completely filtered down to mid-scale projects yet.”

And thanks to much of the franchise business coming from conversion, “we really don’t see the debt markets impacting us,” adds Tony Berger, COO, Wyndham Hotel Group.

At the same time, “from a franchisee’s perspective, no doubt the industry is experiencing a pinch, which makes it all the more important for the franchisee to make sure he/she is buying into a brand that is going to deliver value,” Berger says.

“In times of slowing demand, people who took chances on new brands and hotels looking for occupancy turn to bigger players with reservation systems and marketing programs,” Pepper says. “So we’re seeing a lot of conversions.”

Accor North America’s Motel 6 (above) has a new prototype but still doesn’t offer anything guests don’t need. The brand plans to grow into markets like California. The new-build Wingate brand (below), meanwhile, now affiliated with Wyndham, is targeting faster growth in center city areas and on the U.S. West Coast, as well as in Canada.

“The bigger guys keep getting bigger with Wyndham acquiring US Franchise Systems,” notes Roger Bloss, CEO of California-based Vantage Hospitality Group. “I think we will continue to see the larger companies and publicly held companies grow—they have to grow for shareholder value, so I see that as a continuing trend and a way of minimizing the competition.”

Berger says he’ll leave it to Wyndham’s chairman to talk about further acquisitions, but “we’re always looking at where there is space in our portfolio, where we need to expand, and whether to do that with existing brands and line extensions or acquisitions.”

As for other trends in franchising, they include a high-level of developer and consumer interest in upscale select-service lifestyle products, and—as evidenced by Choice’s search and the activity with its Mainstay and Suburban brands (three new master development agreements in the Midwest, on the West Coast and in Canada)—extended-stay products.

“Occupancy levels of the upscale select-service segment… well, it is becoming the mid-scale-without-F&B segment of the ’90s,” Pepper says. “We’re starting to see a real proliferation of that type of product between us (with Cambria Suites) and the other brands launched because it is fitting the need of what guests are looking for today.”

Meanwhile, most developers of the new-build Cambria product started with lower-end Choice products, have made money with those, and now are looking to move upscale.

Another trend is the rolling out of new “value-engineered” and/or flexible prototypes for the various brands, partially because of rising land and construction costs, and partially because franchisees are more than ever focused on ROI and are demanding that all spaces be income producing.

“We are involved in that pretty extensively across a number of brands,” Berger says. “Eventually, we will get to almost all of them.”

Wyndham’s brands are seeing new construction deals mostly concentrated in the Southeast and Southwest, and Choice’s Pepper says Texas has been notably strong for the last couple of years.

The West is another region that is under-developed in certain segments, as demonstrated by Accor North America looking to bring franchisees into the California market. “We are taking risks jointly with them,” says Accor NA CEO Olivier Poirot, noting that the company is getting back into corporate development and purchasing land for new properties after a 10-year hiatus.

Also strong in the United States has been major market activity, including in New York City, where multiple Cambria and Comfort Inn projects are under way, as are Wyndham Garden Inn projects.

And not to be excluded is suburban corporate park growth—the target of other players like NYLO, which recently launched a franchising program, and Starwood’s new aloft and element brands—especially for extended-stay products, as long stays are common in these areas.

The Northeast and Midwest, meanwhile, are slow. Using the Midwest as an example, “you’re almost following the economy of those regions in what’s getting done,” Bloss notes.

Companies like White Lodging and CSM Lodging continue to roll out Marriott’s Residence Inn product, which has a next-generation design package, including stainless steel appliances and granite countertops in kitchens.

Berger mentions new-build Ramada projects in particular as a good fit in Canada, as well as Wyndham’s Super 8 brand. And Bill Hall, senior vice president for the Wingate by Wyndham brand, adds, “Wherever there are centers of commerce or business where Wingates fit well, our guys will be out there trying to sell deals. We see Canada as a good, strong opportunity to grow.”

Meanwhile, Pepper notes that Choice recently executed a master development agreement with a developer who wants to build 25 Mainstay and Suburban extended-stay products in Canada, where the company is “seeing some tremendous growth.”

And IHG announced recently that the Holiday Inn family of brands has the largest pipeline of all mid-scale brands in Canada, with more than 50 hotels (most are Holiday Inn Express projects).

“As one of only two countries to currently have hotels open across all seven IHG brands, we consider Canada to have tremendous potential for growth, especially with our Holiday Inn brands,” says Gopal Rao, IHG’s regional vice president of sales and marketing for Canada.

Accor North America is likewise looking to grow its Motel 6 and Studio 6 brands in Canada through a master franchise agreement with the Toronto-based Realstar Group.

The International Landscape

International franchising is a growing and fertile opportunity that has not been as prevalent in the past. With demand for branded hotels in international markets, difficulty acquiring land in Europe and Asia and changing attitudes toward the franchising model outside North America, companies are increasing their franchising focus in these markets, where there is great opportunity for both conversion product and unit growth.

IHG CEO Andy Cosslett and his team are aggressively expanding the company's Staybridge Suites brand in Europe, including new projects in the UK and Russia.

The same is true for Hilton Hotels Corp., a company focusing much of its efforts on rapidly expanding its established U.S. brands—like Doubletree, Hampton and Hilton Garden Inn—internationally.

For example, a Hilton franchise agreement with Shiva Hotels in the UK calls for a Hampton by Hilton in Leeds Eastgate and a Hampton by Hilton in Derby. Another franchise agreement with an experienced developer of other brands calls for an additional 25 Hampton by Hiltons in the UK market. And an agreement with ZAO Russkaya Kompaniya Razvitiya lays the groundwork for the introduction of theDoubletree by Hilton product in Russia.

Hilton’s focus for the Doubletree product is conversion throughout Europe. “We see real opportunity to work with owners of existing hotels across Europe to bring them into theHilton family, and Doubletree is the major vehicle for that,” says Patrick Fitzgibbon, senior vice president of development, Europe and Africa.

“As much as 20% of the new stock we’re adding could be existing stock that’s converted,” he says. “There also may be some conversions for [the] Hilton [brand].”

Like Hilton and most other big hotel companies, IHG is hard at work in Russia, signing a franchise agreement with Light Road LLC for a Staybridge Suites hotel expected to open in St. Petersburg in early 2009.

And Choice is active and looking to grow throughout Europe moving forward as well, especially now that the company has re-assumed control there from a master franchisor.

“We’re pretty aggressive and we think we’ll be able to grow our brands much faster [in Europe] than they grew over the last couple of years,” Pepper says.

European regional brands also are ramping up franchising efforts, with Stockholm-based Scandic paving the way for franchising in the Nordic region and Golden Tulip Hospitality in February adding 27 properties in Germany via franchise agreements.

As for Asia, although franchise fees can be greater than management fees in many instances, franchising is becoming more viable in the region, especially in China, where “we’ve got north of 50 Super 8s open,” Berger notes. “China and India are the two markets with the most potential for us,” he says.

“Just in the last year or so we’ve signed two development partnerships—one on Ramada, one on Super 8—we don’t have the numbers in terms of properties up and open yet, but our partners in India have done a lot of building and are well entrenched in the market, so we expect to evolve quickly into numbers open and operating,” Berger says.

“And it is not uncommon for us to have interest from franchisees here in the U.S. who want to build something in India,” he adds.

Pepper seconds Berger’s optimism about India, noting that the country “has been a big provider of new projects for us.”

Direct comments to: derek.gale@reedbusiness.com