Lehman Brothers' real estate assets may offer attractive returns, says John Kessler, who helps oversee more than $50 billion of global real estate for Morgan Stanley.

"I think there are potentially some interesting opportunities to invest there," Mr. Kessler, the chief operating officer of Morgan Stanley Real Estate Investing, said at a conference last week in Madison, Wis., sponsored by the Wisconsin Real Estate Alumni Association Inc. "They have a big portfolio" of commercial and residential debt and equity.

Lehman's assets are being sold as commercial real estate prices fall and office vacancy rates rise worldwide. Commercial real estate has already slid about 10% to 15% from its peak and could fall as much again, Mr. Kessler said. Because few transactions have taken place, he said, it is hard to quantify the decline.

"I think maybe we're halfway there in terms of the move," he said. "When will it stabilize? It all goes back to the credit markets and the availability of debt. Values are not going to stabilize until the debt markets do, and I don't think the markets are going to stabilize until the housing market does. I don't think it's this year; hopefully, it's next year."

Lehman tried to sell parts of its commercial mortgages and related assets to private-equity firms and real estate companies before filing for bankruptcy protection on Sept. 15. After its sales efforts foundered, the firm proposed spinning off as much as $30 billion of commercial real estate assets to shareholders in the first quarter.

Morgan Stanley recently tried to sell a $100 million shopping center that "had good tenants and was well leased," Mr. Kessler said. It sought to sell at a capitalization rate, or income divided by purchase price, of around 6%, he said. "There was no meaningful interest at the price we'd transact at," he said. Instead, the firm heard offers that started at about an 8% cap rate.

As banks retreated from new lending, sovereign wealth funds and other institutions flush with cash, including foreign banks, have begun to fill the gap. "I think there's particularly good opportunity in senior debt," Mr. Kessler said. "Life companies are still making loans, and German and Japanese banks are making loans."

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