The financial institution spent more than $8 billion on property over the course of 2007, but prices in the market have dropped by around 43 per cent during the past two years.
It bought 10 offices in San Francisco from Blackstone Group for $2.5 billion in May 2007 but is now selling half of them.
Alyson Barnes, a spokeswoman for Morgan Stanley, told Bloomberg: "This isn't a default or foreclosure situation.
"We are going to give them [AREA Property Partners] the properties to get out of the loan obligation."
Michael Knott, a senior analyst at Green Street Advisors in California, estimated that the value of the properties may have halved since the purchase, adding that he was unsurprised the deal ran into trouble.
Next month, James Gorman will become Morgan Stanley's new chief executive officer (CEO) after John Mack relinquishes the post at the company.
Mr Mack will remain at Morgan Stanley as chairman.
By Tony Aynsley