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Playing the Hotel Industry: Are the Returns Worth the Risks?

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Sep. 8 2015, Updated 3:05 p.m. ET

Comeback after the economic crisis

The US hotel industry was badly affected by the economic crisis. Sales plunged, commercial-property prices collapsed, rooms remained vacant, and a weaker dollar added to the industry’s woes. In 2014, however, the industry witnessed a comeback, reporting occupancy levels not seen since 1984.

Aside from a few places where the economic and political conditions have been bad, the industry saw worldwide sales growth. Demand for hotels grew, and better average daily rates brought higher RevPar (revenue per available room) to companies throughout the industry.

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Possible risks

There are some factors that could dampen this revival. First, the hotel industry’s growth outlook faces potential threats such as fluctuations in the US dollar value, the critical state of the unstable Eurozone and other economies, and oil prices.

As well, supply growth is still lower than the anticipated rates and the long-term average of 1.9%.

Third, online travel agent companies are experiencing immense demand. These companies reduce hotel margins by commanding as much as 20% commissions for bookings. The steadily growing sharing economy, including startups such as Airbnb, is also becoming more popular.

Finally, RevPAR growth may slow down as the economy matures.

These are some of the added risk factors endured by hotel companies such as Marriott International (MAR), Hilton Worldwide (HLT), Starwood Hotels & Resorts Worldwide (HOT), and Wyndham Resorts (WYN).

Such risks could have a negative impact on ETFs including the PowerShares Dynamic Leisure and Entertainment Portfolio ETF and the Consumer Discretionary Select Sector SPDR Fund (XLY), which invest in hotel companies. For example, Marriott forms 0.56% of XLY.

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