The Bay Area Real Estate Journal
Morgan Stanley Gives In
Submitted December 9, 2009, 9:16 PM
Morgan Stanley will turn over to its lender five of the nine San Francisco properties it bought for a record-setting price in 2007 from The Blackstone Group as part of what it hopes will be an “orderly transfer” of the assets.
The other buildings are owned by a different Morgan Stanley fund and are not in danger of default. These buildings will be Morgan Stanley’s sole ownership position in San Francisco.
"MSREF V US is in ongoing discussions with its lenders regarding the orderly transfer of five of the office properties acquired in May 2007 from Blackstone. While we remain committed to the San Francisco property market, the Fund is currently taking the appropriate action to fulfill its fiduciary obligations to its investors,” Morgan Stanley spokeswoman Alyson Barnes said in a prepared statement.
The mezzanine lender on the five buildings is AREA Property Partners, the former Apollo Real Estate Advisors. GE Capital is also a lender. Both are involved in the negotiations with Morgan Stanley.
AREA and Morgan Stanley have puzzled for months to try to salvage some interest for the bank, sources said. More recently, AREA has hired appraisers to evaluate the buildings. There is some question if AREA also has lost all of its investment.
Anton Qiu, a principal with San Francisco brokerage TRI Commercial, said Morgan Stanley’s decision does not come entirely as a surprise. “From a brokerage standpoint, we expected this would come to an end. Some of those buildings were difficult to do deals in because when they bought them, they had certain anticipated rents and they are so far from reality.” Managers have continued to ask for those rents up until very recently, he said. In addition, no one wanted to fund the costs of signing leases including tenant improvements and brokerage commissions.
This default and the several that have preceded it are part of an inevitable process that will play out over the next year to 18 months whereby values in San Francisco commercial property will be re-set, he said. That, of course, has implications for other property owners as well as for banks and other lenders.
San Mateo-based Glenborough LLC, which is owned by Morgan Stanley, manages the MSREF V assets. The five properties carry significant amounts of debt and are suffering along with many others in the current economic environment. Two of the five buildings, One Post and 400 Howard, are well-leased and together account for about 750,000 square feet of the nearly 1.2 million square-foot total in this fund. The other three are faring less well.
According to data from the CoStar Group Inc., 60 Spear Street is 12 percent occupied and 188 Embarcadero is 68 percent occupied. Rents are also declining. A 4,730 square-foot lease signed at 201 California, also called the Hibernia Bank Building, in May 2008 had an effective rent of $44.08 a square foot. Less than a year later, a 2,361 square-foot lease in the same building had an effective rent of $29.19 a square foot, according to NAI BT Commercial. Both leases had three-year terms.
Morgan Stanley’s Prime Property Fund, which will continue to own the other four buildings, is a lower-risk investment vehicle with diversified property holdings across the country and property types. Its current leverage is less than 50 percent, according to a third-quarter Morgan Stanley report. The buildings that the Prime fund will continue to own are One Market Plaza, One Maritime Plaza, 150 California Street and 75 Howard Street.
The Prime fund also is suffering. The fund, which owns more than two million square feet in San Francisco acquired in the Blackstone buy, has 212 properties nationwide. Since the end of last year, the fund has lost $1.9 billion in asset value. Its net assets, including more than $1.7 billion in debt, are worth $3.97 billion.
Morgan Stanley bought the properties at what is widely considered the peak of the commercial real estate investment boom that gripped the country and the Bay Area from 2005 through 2007. The New York bank paid $2.6 billion for the portfolio, about $650 a square foot, according to numerous reports at the time.
Another blockbuster commercial property transaction precipitated the Morgan Stanley deal. In a $36 billion trade in November 2006, New York-based private equity firm The Blackstone Group acquired the former Equity Office Properties Trust, the largest office property owner in the country at the time. Blackstone then proceeded to sell off portions of the EOP assets including the San Francisco properties. Blackstone elected to hold on to many of the EOP assets in Silicon Valley, however, and continues to own them today.
Whatever else someone might say of the nine buildings, as a group they are exceptional for their prominence. According to CoStar, the two-tower, 1.4 million square foot One Market Plaza is a “world-class asset in a world-class city with world-class tenants.” One Post, also known as the McKesson Building, is clad in Norwegian emerald granite with floor-to-ceiling windows.
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