Hotel REITs and Lodging Sector Stability: Navigating Operational Risks in Third-Party Managed Brands and Franchise Models

The lodging sector's resilience in 2025 hinges on how hotel REITs manage operational risks tied to their management structures. As macroeconomic uncertainties persist, the distinction between franchise models and third-party managed brands has become a critical factor in evaluating stability and profitability. This analysis explores the nuanced risks and trade-offs inherent in these two operational frameworks, drawing on recent industry data and case studies.

Franchise Models: Flexibility vs. Brand Constraints

Franchise hotel REITs offer lenders greater post-foreclosure flexibility, as highlighted by Goodwinlaw's analysis of subordination, non-disturbance, and attornment (SNDAs) agreements, a Goodwinlaw analysis. Unlike third-party managed brands, which prioritize non-disturbance rights for operators, franchise agreements allow lenders to terminate contracts and rebrand properties if the original franchisor permits it, according to the Goodwinlaw analysis. This flexibility can be advantageous in distressed markets but introduces instability for owners reliant on brand-specific revenue management systems.

However, franchising also imposes operational constraints. Franchise fees, typically 10–20% of room revenues, are tied to brand standards and loyalty programs, limiting customization in areas like food and beverage offerings, as noted in a Hotel Online article. For example, large-scale franchised hotels benefit from standardized procedures that mitigate managerial inefficiencies, according to a ScienceDirect study, but this rigidity can hinder adaptability in niche markets.

Third-Party Managed Brands: Stability and Complexity

Third-party managed brands, by contrast, offer more operational agility but require navigating dual legal agreements-franchise and management contracts-which increase administrative costs and complexity, as noted in a HospitalityNet opinion. These models thrive in upscale hotels, where tacit knowledge embedded in skilled staff is critical for maintaining quality standards, according to the ScienceDirect study. For instance, subordination agreements protect management companies from premature termination as long as they meet performance benchmarks, fostering long-term stability, according to the Goodwinlaw analysis.

Yet, this structure is not without risks. Sunstone Hotel Investors, Inc., which relies heavily on third-party managed brands, reported a 6.6% decline in Adjusted EBITDA to $50.1 million in Q3 2025, attributed to subdued demand in leisure and government travel segments, according to a Bloomberg article. Despite a 2.0% rise in Total Portfolio RevPAR to $216.12, the company's earnings were pressured by the need to balance brand compliance with market-specific adjustments.

Risk-Return Profiles and Market Dynamics

Empirical studies reveal that franchise and third-party managed REITs exhibit similar risk-return characteristics when analyzed through multifactor models, according to a ResearchGate publication. However, performance diverges based on hotel type: management contracts outperform franchising in upscale properties, while franchising excels in large-scale operations, according to the ScienceDirect study. This aligns with Sunstone's experience, where the need for property improvement plans and brand-mandated reserves complicates cost management, according to the Goodwinlaw analysis.

Operational risks also extend to human resources. Branded hotels benefit from structured training programs that attract skilled staff, whereas independent or third-party managed properties often struggle with retention due to less defined career paths, as noted in the Hotel Online article. This dynamic underscores the importance of aligning management structures with a hotel's market positioning.

Mitigation Strategies and Investment Implications

To navigate these risks, hotel REITs are adopting technology-driven solutions. For example, Smoothie King's partnership with Crunchtime-a platform enhancing inventory and labor efficiency-demonstrates how operational analytics can reduce costs and improve profitability, according to a Morningstar news release. While this case is in the quick-service sector, similar tools are being deployed in hospitality to optimize RevPAR and labor productivity.

Sunstone's recent debt restructuring-extending maturities through 2028 and lowering borrowing costs-exemplifies how financial flexibility can buffer operational volatility, according to the Bloomberg article. Investors should also consider the role of joint ventures and capital expenditures in expanding portfolios, as these strategies can diversify risk across markets, as noted in an SP Global KPI guide.

Conclusion

The choice between franchise and third-party managed models remains a strategic lever for hotel REITs. Franchising offers scalability and lender flexibility but at the cost of operational rigidity, while third-party management provides tailored agility at higher administrative complexity. As 2025 unfolds, REITs that balance these trade-offs through technology, restructuring, and market-specific strategies will likely outperform peers in an uncertain economic climate.