DBRS Morningstar Confirms Ratings on All Classes of MKT 2020-525M Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2020-525M issued by MKT 2020-525M Mortgage Trust as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since issuance. The 10-year fixed-rate loan is interest only (IO) for the full term. The loan is secured by the fee, leasehold, and subleasehold interests in 525 Market Street, a 38-story, 1.1 million-square-foot (sf) Class A office tower in San Francisco’s central business district. Built in 1973, the LEED Platinum-certified property is primarily configured for office use, with first-floor retail space. The trust debt comprises $270 million in senior A notes and $212 million in junior B notes; the whole loan totals $682.0 million inclusive of all senior debt and subordinate debt. The loan is sponsored by a joint venture between New York State Teachers’ Retirement System (advised by J.P. Morgan Asset Management) and RREEF America REIT II, Inc., a Maryland corporation.

According to the September 2022 rent roll, the property was 88.8% occupied, compared with the YE2021 and issuance occupancy rates of 91.4% and 95.0%, respectively. The largest tenants at the subject include Amazon.com Services, Inc. (Amazon; 39.1% of the net rentable area (NRA) with leases expiring between January 2028 and January 2031); Wells Fargo Bank (13.7% of the NRA with a lease expiring in June 2025); and Sephora USA, Inc. (Sephora; 11.0% of the NRA with a lease expiring in October 2023). Sephora is expected to vacate the subject upon its lease expiration and consolidate its offices to the nearby Salesforce East building.

Tenants representing 13.8% of the NRA have leases that are scheduled to expire within the next 12 months, including Sephora. Based on a leasing post by Property Shark as of February 2023, 336,821 sf of space (32.3%) was available for lease at asking rents ranging between $80 per sf (psf) and $95 psf. This includes the vacant units and Sephora’s space. In addition, the units currently occupied by Cloudera, Inc. (Cloudera; 5.5% of the NRA) were listed as available, although Cloudera’s lease is scheduled to expire in May 2025. Per the Q4 2022 Reis report, the North Financial District submarket reported an average asking rental rate of $68.32 psf and vacancy rate of 12.5%, compared with the Q4 2021 asking rental rate of $68.52 psf and vacancy rate of 9.7%.

According to the financials for the trailing nine months ended September 30, 2022, the loan reported a debt service coverage ratio (DSCR) of 2.83 times (x), compared with the YE2021 DSCR of 2.09x, YE2020 DSCR of 1.96x, and DBRS Morningstar DSCR of 2.52x. Over the past few years, approximately $102 million has been invested in the property for renovations and tenant improvements. Despite the upcoming tenant rollover risk, fluctuations in occupancy, and the general uncertainty surrounding office demand, mitigating factors include the subject’s excellent location, good asset quality, sponsorship commitment, and generally healthy performance.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Class X-A 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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

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

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