If there’s been one irresistible topic of conversation for US real estate professionals over the past two years, it has to be the future of Morgan Stanley Real Estate Investing (MSREI).

Ever since the fall of Lehman Brothers in 2008, there has been no let up in speculation regarding the destiny of MSREI and one of the industry’s largest and most (in)famous real estate fund series, the Morgan Stanley Real Estate Funds (MSREF). Indeed, investment onlookers have been titillated as they repeatedly debated whether MSREI and MSREF would be sold off in the same manner as its former rivals, Citi Property Investors and Lehman Brothers Real Estate Private Equity, or whether it might take the route of Goldman Sachs’ Whitehall Street platform and simply fade into the background.

Zoe Hughes

The jury is still deliberating, but last month’s departure of Jay Mantz, vice chairman of MSREI and one of the firm’s longest-standing real estate executives, fuelled the speculation machine once again.

From a personnel standpoint, Mantz’s retreat from Morgan Stanley after nearly 18 years certainly marks the end of an era for the bank’s real estate group. After joining in 1993, Mantz became a pivotal figure in MSREI, running its European fund operations and global investment functions before being named global co-head alongside John Carrafiell in 2005.

After being promoted to global co-head of Morgan Stanley’s merchant banking division in 2007 – alongside Stuart Bohart and private equity head Steve Trevor – Mantz was recalled to the real estate ranks two years later to help salvage MSREF’s reputation after some high-profile departures and the loss of billions of dollars of investors’ equity in its 2006 and 2007 vintage funds. By September last year, Mantz had been succeeded by John Klopp and Olivier de Poulpiquet, both of whom took over the day-to-day running of the real estate group when he was named vice chairman.

In terms of exits, though, Mantz’s departure is perhaps unsurprising – and somewhat telling of the future path for MSREI.

In terms of exits, Jay Mantz’s departure is perhaps unsurprising – and somewhat telling of the future path for MSREI. 

One year into the tenure of Morgan Stanley’s chief executive, James Gorman, the bank has seen a seismic shift in focus away from investment banking, including principal investing, towards client-focused businesses less threatened by tougher regulation, such as wealth management. The realignment has taken many veterans with it, including Mantz’s former investment management co-heads, Trevor and Bohart, and Morgan Stanley’s entire proprietary trading group, which will spin out into a separate hedge fund.

More importantly, this change in strategy prompted Morgan Stanley to reassess its commitment to the MSREI platform last summer. According to people familiar with the matter, Morgan Stanley quietly accepted bids for MSREI and its MSREF funds, with the process eventually stumbling over pricing issues and third-party calls for indemnification against potential losses. Today, a sale is not believed to be in the cards – at least in the near term – with a Morgan Stanley spokesman stressing that the bank remained fully committed to its real estate investing programme and the limited partners it invests on behalf of.

Yet, in contemplating a possible sale, Morgan Stanley itself accepted what the industry has long been saying: MSREI will never be the powerhouse it once was.

Since its peak in 2008, there are now roughly 50 percent fewer professionals working for MSREI globally, PERE has learned. If future MSREF vehicles fail to raise near the $4.7 billion of equity garnered in the latest opportunity fund, MSREF Global VII, that number could be squeezed even further as future fundraising fees falter. As one real estate GP said: “This is a difficult needle to thread, and it will be investors that decide what the future holds.”

Fortunately for Morgan Stanley, the time to decide is not imminent. The investment period for G7, as the fund is known, is believed to run through 2012, with the possibility that investors will allow for some extension. How the institutional investment community reacts after that time, of course, will depend on the performance of new and legacy MSREF vehicles.

If MSREI generates solid returns for G7 and outperforms expectations for its older vintages, investors may return to the fold. If, however, a majority of LPs still are questioning the bank-sponsored fund model, the industry could potentially see three outcomes: MSREI once again being put on the block; Morgan Stanley scaling back the MSREI platform in terms of both size and risk-taking, positioning it primarily for its high-net-worth clients; or a Bank of America Merrill Lynch-style solution, involving the transfer of the management of MSREI to a third party.

Whichever route is chosen, Morgan Stanley Real Estate Investing will change as it looks beyond 2011. For Mantz, his future will remain in real estate investing, people familiar with the property veteran said, with speculation (of course) mounting as to where he will reemerge.