DBRS Morningstar Downgrades Ratings on Four Classes of Citigroup Commercial Mortgage Trust 2015-GC31, Negative Trends on Four Classes

DBRS Limited (DBRS Morningstar) downgraded its ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2015-GC31, issued by Citigroup Commercial Mortgage Trust 2015-GC31, as follows:

-- Class D to BB (sf) from BBB (sf)
-- Class E to CCC (sf) from BBB (low) (sf)
-- Class F to C (sf) from BB (low) (sf)
-- Class G to C (sf) from B (low) (sf)

DBRS Morningstar also confirmed the ratings on the following classes:

-- 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 B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)

Trends on Class B, Class C, Class D, and Class PEZ are Negative, while Class E, Class F, and Class G have ratings that generally do not carry trends in commercial mortgage-backed securities (CMBS). All other trends are Stable.

At the last rating action in November 2022, DBRS Morningstar changed the trends on Class F and Class G to Stable from Negative, largely due to loss suggested by the January 2022 appraisal for the largest loan in the pool, 135 South LaSalle (Prospectus ID#1, 15.4% of the pool). However, since that time, a new appraisal has been obtained, dated January 2023, showing a sharply lower figure and significantly increasing the loss projected by DBRS Morningstar as a result—that increased loss projection is the biggest driver for the downgrades and trend changes with this rating action.

As of the March 2023 remittance, 47 loans of the original 50 remain in the pool with an aggregate balance of $649.9 million, representing a collateral reduction of 10.2% since issuance. Fifteen loans, representing 19.7% of the pool balance, have fully defeased. There are two loans in special servicing and one loan on the servicer’s watchlist, representing 16.2% and 2.0% of the pool balance, respectively. The pool is concentrated by property type with approximately 40% of the pool secured by office properties. Given the shift in demand for office space that has continued to take shape following the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar anticipates upward pressure on vacancy rates, longer re-leasing periods, and related effects in lower investor demand and value declines, even for performing assets. In the analysis for this review, loans backed by office and other properties that were showing performance declines from issuance or otherwise exhibiting increased risks from issuance were analyzed with stressed scenarios to increase the expected losses as applicable. One of those loans, Pasadena Office Tower (Prospectus ID#4, 6.3% of the pool), was stressed to reflect performance declines driven by occupancy losses and what is expected to be lower investor demand for office properties in suburban and tertiary locations.

The 135 South LaSalle loan is secured by a Class A office property, commonly known as the Field Building, and is in the central business district of Chicago. The loan transferred to special servicing in November 2021 for payment default after the former largest tenant, Bank of America (BofA; 62.3% of the net rentable area (NRA)), vacated a majority of its space at the July 2021 lease expiration, bringing occupancy down to just under 20%.

The January 2023 appraisal value was recently made available with the March 2023 reporting, which noted a value of $90.0 million, compared with the January 2022 value of $130.0 million and the issuance value of $330.0 million. Also, the value is below the outstanding loan balance of $100.0 million and when accounting for outstanding advances, the loan exposure increases to approximately $115.0 million. According to several news outlets, the city of Chicago is offering to fund proposals to redevelop the LaSalle Street corridor by selecting three properties out of a pool of six, with the subject reported to be in the running for a spot. The redevelopment program, which was initiated by Mayor Lori Lightfoot, is geared toward transforming dated office space into residential housing, of which a portion of the units will be designated for affordable housing. Although a noteworthy development, it remains to be seen if that prospect will materialize or if the program itself will even be executed given the change in city leadership that will follow the April 2023 election cycle. Based on a haircut to the January 2023 value, DBRS Morningstar analyzed this loan with a liquidation scenario, resulting in a loss severity in excess of 35.0%.

ENVIRONMENTAL, SOCIAL, AND 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 (May 17, 2022).

Class X-A is an interest-only (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 the North American CMBS Surveillance Methodology (March 16, 2023), 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 info@dbrsmorningstar.com.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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