Morgan Stanley Strategically Defaults on 5 San Francisco Office Towers
December 17, 2009 in Best Of The Storm, Fresh Perspectives
For those of you pondering the morals of strategic default, consider this story:
Bloomberg reports Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak
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. Barnes declined to say when the transfer will occur.
“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”
This sounds no different than a deed in lieu of foreclosure.
…
“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 Morgan Stanley buildings may have lost as much as 50 percent since the purchase, he estimated.
…
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, with the purchase giving the bank 3.9 million square feet of office space there.
…
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 International 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.
Summarizing, Morgan Stanley greedily paid “eye-opening” prices for trophy buildings. Since then, rents and property values have collapsed. Now, Morgan Stanley is giving the properties back to the bank.
Morgan Stanley isn’t worrying about being ostracized or shamed in any way. Beyond that, how is this different from a homeowner deciding to walk away?
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