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Morgan Stanley Punished by CRE Crash

Morgan Stanley (MS) is feeling the pain of "jingle mail." That's when property owners, typically underwater on their mortgages, send the keys back to the bank and just walk away.

Except in this case it's the bank that's doing the walking. Morgan is returning five San Francisco office buildings it bought two years ago for more than $8 billion to its lender, private equity firm Blackstone Group (BX). Note that the securities firm isn't facing foreclosure on the properties -- it's not even behind on the payments. It simply wants out from under the loan, which is greater than the value of the real estate.

Reports Bloomberg:

The San Francisco transfer would mark the second real estate deal to unravel this year for Morgan Stanley, which bet big on the property markets as prices were rising. The firm last month agreed to surrender 17 million square feet of office buildings to Barclays Capital after acquiring them for $6.5 billion in 2007 from Crescent Real Estate Equities.
This is the commercial real estate bust in action. As in the housing crisis a couple years ago, real estate prices are plunging nationwide, except this time it's hurting the value of offices, apartments, shopping malls and industrial buildings.

That's taking a particular toll on major U.S. cities, where high unemployment is driving down demand for commercial space. As of the third quarter, office rents in San Francisco were down roughly 35 percent, from a peak of $57.01 per square foot a year ago. Real estate research firm Colliers International expects more building owners in the city to default on their loans:

The drop in rental rates coupled with a lack of capital since the peak of the market have weakened property values. As a result, several major downtown buildings have fallen into default. Unlike markets where distressed properties have been piling up, San Francisco has only recently begun to see its properties return to lenders. This trend will accelerate over the coming months.
Morgan isn't the only commercial property owner to take a bath in San Francisco. Real estate firm Lincoln Property this summer took a major loss in selling a 16-story office tower at 250 Montgomery St. to a buyout firm. And a New York real estate investment firm, Broadway Management, recently had to scramble to restructure its debt with Lehman Brothers on a cluster of properties.

Yet Morgan is in for a particular beating on CRE. As of Sept. 30, the firm had $7.8 billion in exposure to commercial mortgages, noted a Morgan exec in the firm's third-quarter conference call. That's starting to take a serious toll.

As I previously reported, Hawaii's Maui Prince Resort, which Morgan and local developers bought in 2007 (again at the top of the market) for $575 million, fell into foreclosure earlier this year.

Worse, Morgan will take a $1 billion loss in selling Crescent, a commercial property manager in bought only two years ago (yep, at the top of the market), to Barclay's. In a conference call to discuss the firm's quarter earnings report, a Morgan exec noted that a $356 million pre-tax loss in its asset management business was "primarily driven by real estate losses related to Crescent."

Another dicey deal appears to be Morgan's investment in the planned Revel casino and hotel in Atlantic City. Not surprisingly, gambling revenue there is way down, throwing several casinos controlled by Donald Trump into financial trouble (Trump Entertainment Resorts filed for bankruptcy in February.)

Morgan may need more envelopes.

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