When Richard Rainwater, the renowned Texas investor, sold Crescent Real Estate Equities Co. to Morgan Stanley for $2.78 billion early last year, some Crescent shareholders complained the price was too low.

Now it looks like Morgan Stanley's shareholders are the ones who should have been griping.

Morgan Stanley, one of the largest real-estate investors among Wall Street firms, originally planned to put Crescent's office buildings, resorts, housing projects and other properties in one of the real-estate funds it manages for institutions and wealthy individuals. But the firm decided to keep what is now $4.6 billion of assets on its balance sheet instead, exposing Morgan Stanley to potential losses. The company didn't disclose the value of the assets at the time, but the overall deal was valued at $6.5 billion, including the assumption of $3.1 billion of debt.

Michael Stravato for The Wall Street Journal According to Real Estate Alert, Greenway Plaza in Houston is among the Crescent properties that Morgan Stanley is trying to sell.

The reason? Morgan bought Crescent before the credit crunch hit and commercial-real-estate values started to fall. It was also before Morgan was able to launch the fund that it hoped would own the properties. That left Morgan trying to persuade investors to buy into a fund including properties with top-of-the-market prices, something Morgan was unable to do.

A Morgan Stanley spokeswoman declined to discuss Crescent. In a securities filing, the firm cited "current market conditions, valuation, size of the investment and timing of the fund" as reasons why it held onto Crescent.

'Peak-Market Price'

"It's likely that investors didn't want those properties or Morgan Stanley couldn't distribute those properties into the fund at a price that investors were willing to pay," says Cedrik Lachance, an analyst with Green Street Advisors Inc., a Newport Beach, Calif., real-estate research and trading firm. "Investors didn't want to pay the peak-market price."

Morgan Stanley marked down the value of the Crescent properties by $150 million in its fiscal second quarter ended May 31, deepening losses for its asset-management business. Additional write-downs are likely if commercial-property values keep declining.

The Crescent deal is yet another example of the damage being done to Wall Street firms by their aggressive push into commercial real estate when money was easy and prices were rising. Lehman Brothers Holdings Inc. has been hammered by ill-timed investments in California land and New York City apartment buildings. Commercial banks Wachovia Corp. and Bank of America Corp. have high exposures to deteriorating construction loans.

So far, Morgan Stanley's reported real-estate losses have been relatively small. The firm has significantly reduced the amount of commercial-real-estate debt on its balance sheet without taking the sort of painful write-downs that rivals have.

Morgan Stanley made headlines late last year when a venture led by the firm bought 11,000 house lots from home builder Lennar Corp. for $525 million, about 60% less than where Lennar carried the land on its books. While that land has likely fallen further in value, Morgan Stanley isn't at risk. The firm was able in that case to put the holdings in an investor fund, according to people familiar with the matter.

Real-estate funds, also known as opportunity funds, have become a big business on Wall Street over the past 15 years. Now more than 500 funds have been raised or are being raised from pension funds and other institutional investors, according to Real Estate Alert, a trade publication. They typically seek net returns, after management fees, of at least 10% for U.S. investors. But many of them have run into choppy waters this year because tight credit has made it very difficult to buy or sell property.

Risky Business

Investment firms without the balance sheets of large investment banks typically don't buy property for real-estate funds until the money has been raised. The benefit of buying before the money is in place is that it allows investment banks to move quickly. But they risk losing investor commitments if the property they buy becomes undesirable.

Morgan Stanley has been one of the most active real-estate fund managers. As of June 30, the New York company had $96.4 billion in real-estate assets under management, according to the firm. Morgan Stanley is about to close an approximately $1.5 billion commercial-real-estate debt fund and is in the process of raising a global real-estate fund with $10 billion in targeted equity capital, according to Real Estate Alert.

A 7% Discount

Crescent, co-founded by Mr. Rainwater and John Goff and taken public in 1994, was one of the weakest performers in the real-estate-investment-trust sector when it announced in May 2007 that it was selling itself to Morgan Stanley. The sale price represented a 7% discount to the underlying value of its real estate, analysts said at the time.

Some Crescent shareholders complained that the company could have commanded a better price by divesting itself of some resorts and other "noncore" properties and focusing on the office sector.

Since the deal was completed in August 2007, Morgan Stanley has been shedding some of the Crescent properties. It has closed the sale of about $552 million of assets, committed to selling $411 million and offered to sell an additional $1.3 billion, according to Real Capital Analytics, a research firm in New York.

Hits to Morgan Stanley

Morgan Stanley appears to have taken some financial hits on these sales.

For example, the firm sold a Denver office complex for $31.8 million in June. That property was valued at nearly $33 million a year earlier, according to Real Capital.

Among other properties Morgan Stanley is trying to unload: Greenway Plaza, a 10-building office complex in Houston. In July, the estimated value of the property was about $826 million, according to Real Estate Alert.

Crescent holders, though annoyed at the deal at first, may end up with the last laugh.

Write to Lingling Wei at lingling.wei@dowjones.com and Aaron Lucchetti at aaron.lucchetti@wsj.com

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