Thursday, 17 December 2009 05:00

Doesn't Morgan Stanley Read My Blog?

At least a few MDs at Morgan Stanley DO read my blog, but it is obvious that the guys in the real estate division don't. Early in 2008 I named Morgan Stanley the "The Riskiest Bank on the Street". The following is one of the reasons why. From Bloomberg: Morgan Stanley Surrenders Five San Francisco Office Towers Bought at Peak [In reading this, notice the extreme irony in one of the country's largest investment banks walking away from a property deal, and contrast it to a homeowner in the same position. Hey, if MS can do it, why can't I?]

Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings, which have been held by the bank’s MSREF V fund. Barnes declined to say when the transfer will occur.

“It’s not surprising this deal ran into trouble,” Michael Knott, senior analyst at Green Street Advisors in Newport Beach, California, said in an interview. “It was eye-opening among a group of eye-opening deals. There was almost no price too high in 2007 for office space in top gateway markets.”

The San Francisco transfer would mark the second real estate deal to unravel this year for Morgan Stanley, which bet 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. U.S. commercial real estate prices have dropped 43 percent from October 2007’s peak, Moody’s Investors Service said last month.

Lost Value

The Morgan Stanley buildings may have lost as much as 50
percent of their value since the purchase, Knott estimated.

“This isn’t a default or foreclosure situation,” Barnes
said. “It is a negotiated transfer to our lenders.”

Morgan Stanley bought 10 San Francisco buildings in the
city’s financial district as part of a $2.5 billion purchase
from Blackstone Group
in May 2007. The buildings were formerly
owned by billionaire investor Sam Zell’s Equity Office
Properties and acquired by Blackstone in its $39 billion buyout
of the real estate firm earlier that year.

The buildings Morgan Stanley is giving up are One Post, 201
California St., Foundry Square I, 60 Spear St. and 188
Embarcadero. The towers have a combined 1.3 million square feet,
according to Colliers International.

The bank will continue to own the other office buildings it
acquired in the Blackstone deal, Barnes said.

Morgan Stanley, based in New York, was the biggest property
investor among Wall Street firms at the time of the purchase.
The transaction made the company one of the largest office
landlords in San Francisco, adding 3.9 million square feet of
office space there.

Defaults Rise

Commercial mortgage defaults more than doubled in the third
quarter from a year earlier as occupancies fell, according to
Real Estate Econometrics LLC. Office vacancies will reach a
near-record 19 percent in the first quarter of 2011, broker CB
Richard Ellis
Group Inc. estimated.

Property sales financed with commercial mortgage-backed
securities plunged 95 percent from a record $237 billion in
2007, according to JPMorgan Chase & Co. A lack of securitized
debt is driving down values, which may fall 55 percent from
their peak, Moody’s said.

San Francisco prime office rents fell 37 percent in the
third quarter from a year earlier, the biggest decline since
2001, as companies cut jobs, Colliers said. The vacancy rate
rose to 14 percent, the highest since 2005. Almost 1.4 million
square feet of space was returned to the market in the first
nine months of the year.

In September of 2007, in the very first post on my blog, I announced that the CRE market would crash. I made the announcement again in December of that year and even created a schedule of who would be crashing with their CRE sales. See "Will the commercial real estate market fall? Of course it will" 09 December 2007.

Thus far, quite a few guys on that list have gone bust. How was I able to do that you ask? Well, they paid too much money using too much leverage at the top of what was an obvious bubble. In addition, things were so frenetic that they were literally (well almost) day trading assets that took 3 month or so to transfer at a roughly 7% transaction cost. Last time I looked (okay, maybe time before last), real estate was an income investment, not a trading vehicle for instant capital gains. Sure you can improve the property and extract value elsewhere, but come on... Flipping entire mutli-billion dollar portfolios in a matter of days or weeks??? If that wasn't a sign of the top, I wouldn't know what was.

This is an excerpt from that post in December. Notice, half of the companies on this list either have, or will soon cough up those properties that they bought (read the entire article for context):

If you think these numbers might look just a little hairy, just wait and see the numbers of the companies that I am actually shorting. The one's above were actually cut off of the short's short list, so to say. Once you see, you will be a believer just like me - commercial real estate is on its way down. See comments below for more on the accuracy of the book calculations I use in my analysis vs. used in this story.

Details of transactions for sale of properties by Blackstone Group


Particulars of transaction



12th June, 2007

Sold Extended Stay Hotels

The Lightstone Group LLC

$8 billion

9th August, 2007

Sold 38 assets comprised of 106 office buildings and 5.9 million square feet in San Diego, Orange County, San Francisco, Seattle, Portland and Salt Lake City. The properties are from the CarrAmerica West Coast Collection that Blackstone Group purchased last year as part of a national portfolio.

GE Real Estate-owned Arden Realty


17th July, 2007

Merlin Entertainments Group, the leisure park operator owned by Blackstone, sold its property assets to


property firm Prestbury Group plc owned by real estate investor Nick Leslau.

Prestbury Group plc

$1.27 billion

27th August, 2007

Sold 9 suburban Chicago office complexes to GE Real Estate. Blackstone acquired these properties when it bought Equity Office Properties Trust.

GE Real Estate

$1.05 billion

27th August, 2007

Sold a portfolio of downtown Chicago properties to Tishman Speyer. Blackstone acquired these properties when it bought Equity Office Properties Trust

Tishman Speyer

$1.72 billion

9th February, 2007

Sold 6.5 million square feet of Manhattan office space Macklowe Properties. Blackstone acquired these properties when it bought Equity Office Properties Trust.

Macklowe Properties

$7 billion

Let's fastforward to today, where we may learn the fate of another one those
guys who bought that CRE flip from Blackrock. From Crain's Chicago
Business, "Zombie fears stalk Tishman in the Loop"

A venture led by Tishman Speyer Properties L.P. has
defaulted on part of a package of loans used to finance the
$1.72-billion purchase of six prime downtown office towers during the
frenzied real estate market of 2007, sources familiar with the deal

The New York developer bought the
5.7-million-square-foot portfolio from Blackstone Group, which flipped
them as part of the New York private-equity firm's $39-billion
leveraged buyout earlier that year of Sam Zell's Equity Office
Properties Trust.
[Anybody reading my blog in 2007 or even knew me in 2006 could have seen this coming a mile away!]

We can all wonder how Macklowe is doing???

BlackRock loses millions on Macklowe loans | The Real Deal | New ...

Apr 7, 2009 ... BlackRock pegged the potential loss at $53.2 million from two mezzanine loans on current and former Macklowe Properties office buildings, ...

I don't know if these loans are associated with the Zell/Blackstone flip, but at this point, does it really matter? Practically everything touced during that 2 to 3 year period is blowing up, particularly the 2007 vintage. Ahh, what a fine taste.

Other posts of interest from that 30 day period of two years ago...

While we are at it, let's revisit some of my observations and assumptions in the "The Riskiest Bank on the Street" post of a year and a half ago. Some may have thought I was being a tad bit agressive. Do you think so now? Keep in mind how much leverage is employed when these assets are funded through VIEs (actually, who the hell knows how much leverage is effectively employed, but you can bet your left nipple that it is a lot).

Unconsolidated VIEs, Exposure to loss (in $ mn) and loss ratio (in %)


Source: Company data

Unconsolidated VIE's

FY 2007

$ mn

Unconsolidated VIE assets

Maximum exposure to loss

Loss ratio %





Credit & real estate




Structured transactions








To forecast these loss ratios, we
have used the maximum exposure to loss as the worst case scenario. For
the base case, we expect the loss ratio to be lower than the maximum
exposure to loss.

Base Case

Optimistic Case

Worst Case

Mortgage and asset-backed securitizations




Credit and real estate




Structured transactions




Base Case

Optimistic Case

Worst Case

Mortgage and asset-backed securitizations




Credit and real estate




Structured transactions




Total Losses in $ million




For those of you who are interested in more of my CRE opinion, see Reggie Middleton's CRE 2010 Outlook (42 pages). Banks and investors have been emailing me about the content of this document. Any who are interested at having my team take a look at what you have, download the my capabilities doc ( pdf CRE Consulting Capabilities 2009-12-17 14:17:01 655.48 Kb ) and contact me to talk. I love to talk, and I'm not nearly such a smart ass in person, really!

For subscribers, here is a refresher on the historical work on Morgan Stanley:

Morgan Stanley_final_040408 Morgan Stanley_final_040408 2008-08-30 06:37:54 1.38 Mb

pdf MS Simulated Government Stress Test 2009-05-05 11:36:25 2.49 Mb

MS Simulated Government Stress Test pdf pdf MS Stess Test Model Assumptions and Stress Test Valuation

Morgan Stanley ABS Inventory Morgan Stanley ABS Inventory 2008-08-30 06:37:32 1.65 Mb

Last modified on Thursday, 17 December 2009 05:00