DBRS Morningstar Confirms Ratings on All Classes of GS Mortgage Securities Trust 2017-GS5

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-GS5 issued by GS Mortgage Securities Trust 2017-GS5 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class X-C at A (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the stable to improving performance for the majority of the underlying loans. As of the February 2023 remittance, 28 of the original 32 loans remained in the trust with an aggregate principal balance of $967.1 million, reflecting a collateral reduction of 8.9% since issuance as a result of loan repayment and scheduled loan amortization. The pool is most concentrated by office and retail properties, representing 40.0% and 20.1% of the pool, respectively. Loans secured by office and retail properties had weighted-average debt yields of 8.7% and 9.6%, respectively, based on the most recent financials available. There are currently five loans, representing 19.8% of the pool, on the servicer’s watchlist and three loans, representing 19.3% of the pool, in special servicing.

DBRS Morningstar expects two of the specially serviced loans, 350 Park Avenue (Prospectus ID#1, 10.3% of the pool) and 20 West 37th Street (Prospectus ID#16, 2.8% of the pool), to be returned to the master servicer in the near term. The third loan in special servicing, Writer Square (Prospectus ID #7, 6.2% of the pool) is secured by a 186,233-square-foot (sf) mixed-use property with street-level retail and an 11-story office tower in Denver. The loan transferred to the special servicer in December 2021 after performance declined as a result of impacts of the Coronavirus Disease (COVID-19) pandemic and has consistently been late on payments since, including with the February 2023 reporting.

Property occupancy declined to 68% per the June 2021 rent roll, from 75% in September 2021 and 85% at issuance. Similarly, the debt service coverage ratio (DSCR) declined to 0.78 times (x) as of September 2021, compared with 0.87x at YE2020 and 1.30x at YE2019. Within the next 12 months, seven tenants, representing 19.5% of the net rentable area (NRA) have scheduled lease expirations. According to servicer commentary, a pre-negotiation letter was executed in October 2022, however, discussions remain ongoing as the special servicer is currently assessing next steps for this loan. Given the persistent performance declines and weak submarket, which reported a vacancy of 27.4% according to CBRE Q4 2022 data, DBRS Morningstar analyzed this loan with an elevated probability of default to increase the loan’s expected loss.

The largest loan in the pool, 350 Park Avenue was transferred to special servicing in November 2022 as the servicer determined the loan was at risk of imminent default. More recently, however, the servicer noted the transfer was defined as a complex consent request in light of a new agreement between the sponsors, Vornado Realty Trust and Rudin with Citadel Enterprises America LLC (Citadel), which is an affiliate of Kenneth C. Griffin, the founder and chief executive officer of Citadel.

The details of the proposal have not been included in the servicer’s commentary for the transaction to date; however, according to a December 9, 2022, press release from Vornado, major terms of the agreement include the following: (1) Citadel to enter into a master lease with Vornado for 350 Park (subject) on an “as is” basis for 10 years retroactive to June 2022 at an annual rent of $36 million ($63 per square foot (psf) gross); (2) Citadel to also enter into a master lease with Rudin for the adjacent property at 40 East 52nd (noncollateral); and (3)Vornado and Rudin to enter into a joint venture to purchase 39 East 51st Street for $40 million, with the eventual aim of creating a premier development site between the three aforementioned parcels.

From October 2024 to June 2030, Griffin will have the following options: acquire a 60.0% interest in a joint venture with Vornado and Rudin that would value the site at $1.2 billion to build a 1.7 million-sf office tower with Citadel occupying approximately 50.0% of the NRA on a prenegotiated 15-year lease or exercise an option to purchase the entire combined site for $1.4 billion without participation from Vornado and Rudin. According to a January 25, 2023, press release from Vornado, the agreement as described above has received all necessary third-party approvals with the master lease now in effect at the subject.

Although the occupancy, in-place rental rates, and DSCR are expected to further decline with the new master lease in effect, the recent events are viewed as credit positive given the sponsors’ significant investment and long-term vision for the subject collateral. The $400.0 million whole loan is divided between two other commercial mortgage-backed securities (CMBS) transactions, with 44.0% contributed to VNDO Trust 2016-350P ($233.3 million; rated by DBRS Morningstar) and 23.0% contributed to JPMDB Commercial Mortgage Securities Trust 2017-C5 ($66.7 million; not rated by DBRS Morningstar). For more information on this loan, please view the February 6, 2023 press release for VNDO-2016-350P: https://www.dbrsmorningstar.com/research/403992.

The third loan in special servicing, 20 West 37th Street, is secured by a 77,100-sf mixed-use property in Midtown Manhattan, New York. The loan transferred to special servicing in August 2020 because of imminent default stemming from the impacts of the pandemic; however, a loan modification was executed in September 2022 providing for the reinstatement of the loan to the master servicer following a short rehabilitation period with the special servicer for monitoring, among other terms.

As of September 2022, the property was 49.0% occupied, falling from 61% in December 2020 and 100% at issuance. According to the servicer, however, the borrower signed a new lease with Matrix New World (9.2% of NRA, expiring November 2027), improving occupancy to roughly 58.0%, with an implied average rental rate of $51.98. The tenant is an engineering firm that focuses on climate change, water supply, disaster response, and urban revitalization. The five-year lease provided no TI allowance and will have an initial rate of $42.00 psf. The property faces elevated rollover risk as three tenants, representing 25.2% of the NRA, have lease expirations in the next 12 months. According to Reis, comparable properties within a one-mile radius of the subject reported average vacancy of 14.2%, effective rental rate of $41.51 psf, and asking rental rate of $52.10. No other leasing details have been provided at this point, but the borrower does have access to $476,000 held in a TI/LC reserve to help leasing efforts.

As of the financials ended September 31, 2022, the loan reported an annualized net cash flow (NCF) of approximately $137,400, well below the YE2021 figure of $468,000 and the YE2019 pre-pandemic figure of $1.8 million when occupancy was 94.0%. Based on the Q3 2022 reporting, the loan reported a DSCR of 0.1x, compared with the YE2021 figure of 0.36x and the YE2019 figure of 1.38x. No updated value has been provided since issuance, when the loan was appraised at a value of $54.0 million, reflecting a low loan-to-value ratio of 50.9%; however, value has likely significantly declined given the sustained performance declines. As such, DBRS Morningstar analyzed this loan with an elevated loss default considering the increased leverage to increase the loan’s expected loss.

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).

Classes X-A, X-B, X-C, and X-D are an interest-only (IO) certificates that reference 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 was recently updated on March 16, 2023 (the updates were deemed to be not material) and 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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