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Period of adjustment

A major earthquake nine years ago continues to change property management practices in Japan

By Michiyo Matsumoto, CPM
Ishinomaki: an old locomotive that was moved from its original place by the tsunami
Ishinomaki: an old locomotive that was moved from its original place by the tsunami

In Japan, 2019 was a year full of natural disasters: Historically strong typhoons and torrential rain caused widespread landslides and flooded rivers across the country. The road to recovery continues to be long and arduous for municipalities with damaged buildings.

Nearly nine years later, property management companies in Ishinomaki are still recovering from the direct and indirect effects the disaster had on the city’s real estate market.

The 2011 experience of Ishinomaki City, located in northern Japan, provides insight into how a natural disaster can affect the real estate market, public housing laws and the property management industry, and how companies can recover afterward.

Effects of the disaster

Ishinomaki is the second largest city in Miyagi Prefecture after Sendai. It suffered the most damage of any city in Japan during the Great East Japan Earthquake and tsunami in March 2011. Of the city’s 74,000 existing buildings, 76.62% suffered some form of damage, and 20,039 were completely destroyed.

Nearly nine years later, property management companies in Ishinomaki are still recovering from the direct and indirect effects the disaster had on the city’s real estate market.

Public vs. private housing

It is critical to take into account how public housing laws affect the market after disasters. From 2011 to 2016, the occupancy rate in Ishinomaki City was over 95% due to the demand created by the disaster. Following the disaster, 21% of households moved into post-disaster public housing. This municipal housing owned by the government was made available only to those directly impacted by the disaster. In 2019, regulations on who could apply for public housing in Ishinomaki City were lifted, and access to public housing was made available to the general public—not just to those households impacted by the 2011 disaster. Management companies began losing their share of the market to the government instead of competing against each other for potential renters.

After the disaster, 4,446 government-owned public housing units were built throughout the city. These buildings are not managed by private management companies, but rather by corporations designated by the Public Housing Act. Private building maintenance companies can bid on the system maintenance work at post-disaster public housing, but designated companies take care of all property management and asset management work.

Furthermore, the lower a household’s income is, the lower the rent will be, which has been linked to a drop in the labor force; households that were dual-income before the disaster have reduced the number of hours they work to suppress their income in order to lower their housing costs.

Today in Ishinomaki City, a family with a household income of four million yen (approx. $37,000) can rent a three-bedroom public housing unit for 36,000 yen (approx. $330) a month. Market rate for comparable units is 80,000 yen (approx. $740). Given these numbers, it’s difficult to imagine the household opting to live in a privately owned building. Currently, the occupancy rate for private housing in the city is less than 70%.

Private management companies can remain competitive by focusing on the right market. For households above a certain level of income, it’s more expensive to rent post-disaster public housing than a private residence. It’s critical to have housing that they want to live in.

At our company (Matsumoto Sangyo Inc.), we are focusing on 3- and 4-bedroom apartments, not the 2-bedroom units that are often found in public housing. We’ve also been working to attract higher income tenants. Overall, the luxury apartments and single-family homes they rent (with monthly rents of 90,000-120,000 yen or $850-1,100) make up only 0.5% of the market, but there is less competition because other companies have fewer of these units.

Households that were dual-income before the disaster have reduced the number of hours they work to suppress their income in order to lower housing costs.

Attrition of property managers and market challenges

Even before the disaster, Ishinomaki didn’t have many companies providing property management services, but after the disaster there has been an increase in companies that provide only leasing services or brokerage. Only 15 of the 113 real estate companies are in the property management business, and most of these only do collection and leasing.

Management fees have fallen as the vacancy rate has increased. Companies blame the lack of human resources for neglecting periodic inspections of properties, ignoring income and expenses, and omitting management plans for renovations and improvements; the concept of maximizing the value of a property is getting lost in the shuffle.

The result is that buildings are beginning to deteriorate, and more and more are going vacant. The brokerage business is following the same path as leasing after a long period of high demand due to the earthquake, which made it easy and affordable to find buyers.

As the population ages, another major challenge will be to stop the growth of vacancies that have come about from the rising number of single-person elderly households.

Don’t lose sight of commercial real estate!

Demand doesn’t go away when a disaster hits. The disaster also caused major shifts in commercial real estate.

Major corporations closed branches and offices and acquired properties in alternate areas to consolidate. Property and casualty insurance companies and life insurance companies moved to relocate especially quickly, as did large car dealerships.

After disasters, managers should become experts on the city recovery plan and all related laws.

On the other hand, shopping centers, smaller shops and restaurants made the completely opposite decision based on a trade area study. Even in disaster areas that were covered by 10 feet of tsunami, they decided to repair and open stores or acquire land as long as they expected to have a customer base. Industrial, manufacturing and freight companies also reacquired areas hit by the tsunami because their businesses were tied to industrial ports.

People want to live where there are stores and shopping centers, so this served as indirect business opportunities for residential managers.

Matsumoto Sangyo Inc. is 52 years old, and we’ve taken the disaster as an opportunity to diversify the location of our real estate holdings throughout Japan. Unlike specialized businesses in major metropolitan areas, local real estate companies are expected to be full service, ranging from leasing and brokerage to development and management. We have overcome difficult times by responding to all of our clients’ needs.

What next?

In 2020, IREM Japan will hold its Annual Meeting and Award Ceremony in Sendai, the largest city in Miyagi Prefecture. Attendees will have the opportunity to see firsthand how the disaster affected the city and what the response has been. As we approach the ninth anniversary of the earthquake, we continue to struggle with population decline.

After disasters, managers should become experts on the city recovery plan and all related laws. What are the best tax strategies for owners? Are the managers familiar with public assistance? Do they know where new rental housing will be built? Which buildings will be renovated and which demolished? How should owners repay current debt? Should it be refinanced?

CPMs should provide owners with answers to these questions along with their usual sound advice, just, in this case, formulated for disaster recovery—this is the key to competing in the new market.

Maggie Callahan

Michiyo Matsumoto, CPM, is the CEO of Matsumoto Sangyo Inc., based in Ishinomaki City. She started in the property management industry after the bubble burst in Japan, and in her current role has helped her company grow after the Great East Japan Earthquake.

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