DBRS Morningstar Assigns Provisional Ratings to J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1MEM

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates to be issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1MEM, as follows:

-- Class A at AAA (sf)
-- Class X at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class HRR at B (high) (sf)

All trends are Stable.

Class X is an interest-only (IO) class whose balance is notional.

The JPMCC 2021-1MEM single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in One Memorial Drive, a 17-story Class A, LEED Silver, 409,422-square foot (sf) office building located in the Kendall Square submarket of Cambridge, Massachusetts. The property is located directly adjacent to the Massachusetts Institute of Technology (MIT) and less than a quarter-mile from the Red Line Kendall/MIT transit stop. The property was built in 1985 and in 2018 a $49.0 million capital improvement program was completed. Capital improvements included $2.5 million for full elevator modernization, $1.4 million for HVAC upgrades, $900,000 for roof replacement, $380,000 for a fitness center and bike storage, $1.1 million for lobby and exterior renovation, $7.8 million for tenant improvements (TIs) for the Microsoft space and $19.6 million for tenant improvements for InterSystems’ space, and $14.1 million for conversion of the parking garage Level P6 to a 42,760 sf fully-functioning office suite for InterSystems. Building amenities include the fitness center, a full service cafe managed by an affiliate of the borrower, an on-site Blue Bike station, EV chargers, and bike storage. The collateral also includes a five-story partially below-grade parking garage that provides both tenant and public parking. DBRS Morningstar takes a positive view of the credit characteristics of the collateral, which is directly adjacent to the MIT campus with unobstructed views of the Charles River and Downtown Boston. The building is one of the few in the market not subject to a ground lease.

Currently the property is 98.5% leased to two long-term tenants, Microsoft and InterSystems. InterSystems is a provider of data technology and has occupied the building as its headquarters since 1987 while Microsoft has occupied the building since 2007. Although both are long-term tenants, each of their leases will expire in 2028, prior to the loan maturity. Both tenants have lease extensions at the fair market rate. InterSystems has the right to terminate its lease within six months after receiving a No Availability Notice from the landlord indicating that no potential expansion premises are available, which the borrower would be expected to deliver in December 2023. The termination would be effective 18 months after exercising the termination notice and the termination fee is equal to unamortized leasing costs.

In a post-Coronavirus Disease (COVID-19) environment, DBRS Morningstar expects increased growth in healthcare spending, which is a key driver of the demand for life science and office space. With this rise in spending, much of which is already devoted to disease prevention and treatments for cancer and other chronic conditions, companies focused in these fields will continue to thrive. Given the specialized nature of these industries, coupled with advancements in medical and other technology, a skilled and educated workforce is necessary to sustain profitability of life sciences enterprises. DBRS Morningstar believes the most important factor for the long term sustainability of cash flow is proximity to talent, which means access to research and educational institutions as well as other technology and medical centers, typically located in urban centers.

DBRS Morningstar has a positive outlook of the collateral’s performance because of the credit quality of the existing tenants, the high barriers to entry in the market driven by space and land constraints, the subject’s proximity to MIT, and strong institutional sponsorship. Traditional office space has benefited from the increased concentration of life science companies in the market, which has fueled the conversion of office space to laboratory space. Prominent tech firms and other users of traditional office space compete for the diminishing supply of office space, thus continuing to push rents and reduce vacancy.

The building has two long-term tenants in InterSystems and Microsoft. InterSystems is a critical data technology provider for the healthcare, finance, manufacturing, and supply chain sectors. Since its lease commencement in 1987, InterSystems has renewed four times and expanded 10 times from its original 32,500 sf to its current 239,417 sf, with the most recent expansion completed in 2018. Microsoft, the other major tenant, occupies 156,849 sf. Microsoft comprises 38.3% of the NRA and is rated AAA by Moody’s, S&P, and Fitch. Microsoft is the biggest software company in the world with a market cap of $2.1 trillion as of July 22, 2021, and ranked Number 15 in the Fortune 500 rankings according to Fortune.com. The property has a physical occupancy of 98.5% with both tenants’ leases expiring in 2028: Microsoft’s on June 30 and InterSystems on March 31. However, large blocks of space that could accommodate either of the tenants is effectively nonexistent in the market, giving further support to the likelihood that neither tenant will vacate its respective space.

Kendall Square is the global hub of research and development (R&D) for the life sciences industry, with 18 of the 20 largest pharmaceutical companies and 11 of the largest 15 biotechnology companies in the world having a presence in the submarket. The concentration of such pharmaceutical and biotech companies has driven technology companies like Apple, Google, and others to seek traditional office spaces in close proximity to these life sciences companies. The submarket’s current vacancy rate is below 2% and there is strong leasing activity for projects currently under construction or in the predevelopment phase. Additionally, Microsoft benefits from the collateral’s proximity to MIT and Harvard, creating ample opportunity to attract top talent both as employees and as specialized contractors and consultants. The Greater Boston area employs a total workforce within the life sciences industry of approximately 116,000 people, which accounts for nearly 4.4% of the total private employment within the market.

According to the appraisal, the average in-place rents for the two major tenants are approximately 15.8% below market average. Market rental rates are driven by growth in the life sciences sector, historically low office vacancies, and the continued conversion of traditional office to laboratory space further reducing traditional office inventory. The limited tenant rollover presents minimal opportunity to capture the benefit of increased rental income during the loan term as neither tenant’s existing lease expires before 2028, but the collateral will likely benefit in the long run from increased rental revenue as the leases expire and roll to market, or the tenants extend their leases at the fair market rate.

Many office and laboratory buildings in the market are built on land leased from MIT and other owners. The subject collateral is one of the few institutional-quality assets in the market not subject to a ground lease. Project cash flow is not encumbered by significant, and often increasing, ground rent payments.

The Sponsors are Metropolitan Life Insurance Company (Metlife), a global insurance provider, and Norges Bank Investment Management (NBIM). NBIM is effectively a sovereign wealth fund investing funds generated by North Sea oil revenues for the Norwegian government. The Metlife/NBIM partnership (the Sponsor) has invested in six Class A office buildings in three major markets—Boston, Washington, D.C., and San Francisco—for an aggregate gross asset value of approximately $3.7 billion. Metlife Investment Management is the investment advisor and asset manager. The loan is recourse to the borrower only, and there is no separate recourse carveout guarantor. A guarantor of the obligations of borrower for certain recourse carveout events and the environmental indemnity is customary for rated stand-alone transactions involving similar collateral. The lack of a guarantor is a material limitation of the powerful economic disincentives that are contained in a standard commercial mortgage-backed security (CMBS) nonrecourse carveout and environmental indemnity structure. Mitigating this is the high amount of implied equity the borrower has remaining in the property, as the appraised value indicates a relatively low 50% loan-to-value ratio (LTV).

The DBRS Morningstar LTV is high at 93.29%, based on the whole loan amount of $414.0 million in mortgage debt and the DBRS Morningstar value of $443,772,454. DBRS Morningstar applied a -1% secured debt penalty to its LTV thresholds for the transaction. The DBRS Morningstar value represents a 46.4% discount to the appraised value.

The loan proceeds, together with an estimated equity contribution of approximately $413.8 million (50.0% of cost) from the sponsor, were used to facilitate the acquisition of the property. DBRS Morningstar typically views cash-in acquisition financings more favorably, given the stronger alignment of borrower incentives compared with situations in which a sponsor is refinancing and cashing out of its equity position.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

On September 27, 2021, DBRS Morningstar updated the JPMCC 2021-1MEM presale report to reflect the correct DBRS Morningstar LTV figures in the Capital Structure and the correct Class X notional amount. The analysis and ratings have not changed as a result of this clarification.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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