DBRS Morningstar Changes Trends on Three Classes of Wells Fargo Commercial Mortgage Trust 2018-C44 to Negative, Confirms Ratings on All Classes

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-C44 issued by Wells Fargo Commercial Mortgage Trust 2018-C44 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E-RR at BBB (low) (sf)
-- Class F-RR at BB (sf)
-- Class G-RR at B (high) (sf)

DBRS Morningstar also changed the trends on Classes E-RR, F-RR, and G-RR to Negative from Stable. The trends on all other classes are Stable.

The Negative trends reflect DBRS Morningstar’s concern surrounding the pool’s concentration of office properties, which totals 35.1% of the current pool balance. In general, the performance of the office sector has deteriorated in recent months; vacancy rates in many submarkets remain elevated because of a shift in workplace dynamics leading companies opting for remote and hybrid environments to vacate their spaces entirely or reduce their footprint at or prior to their lease expiration dates. 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. As a result, loans secured by office properties have a weighted-average expected loss that is approximately 65.0% higher than the pool expected loss. Of the pool’s concentration of office properties, there are four suburban office properties in the top 10, representing 20.2% of the trust balance, that have a weighted-average expected loss that is more than 95.0% higher than the pool expected loss. DBRS Morningstar continues to be concerned about the two loans in special servicing, which represent 5.7% of the trust balance and reported updated values that are below issuance values. As part of the analysis for this review, DBRS Morningstar liquidated these loans with the implied loss contained in the nonrated Class H-RR.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. As of the April 2023 remittance, 43 of the original 44 loans remain in the trust with an outstanding trust balance of $735.6 million, reflecting a collateral reduction of 4.1% since issuance. Three loans, representing 5.0% of the trust balance, are defeased. Eleven loans, representing 22.1% of the trust balance, are on the servicer’s watchlist, primarily because of low debt service coverage ratios (DSCRs), occupancy rates, tenant rollover risk, and/or deferred maintenance items.

Prince and Spring Street Portfolio (Prospectus ID#9; 4.1% of the pool balance), the largest specially serviced loan, is secured by a portfolio of three mixed-use properties in New York City. The loan transferred to special servicing in December 2020 for payment default, and the servicer’s current workout strategy is foreclosure. According to the financials for the trailing six-month period ended June 30, 2022, the loan reported a DSCR of 0.22 times (x), compared with 0.08x as of YE2021 and 0.97x as of YE2019. The property was most recently valued at $49.5 million according to a December 2022 appraisal, an increase from the January 2021 appraisal value of $35.3 million, but still down from the issuance value of $66.0 million and below the whole loan balance of $41.0 million. This loan was analyzed with a liquidation scenario, which resulted in an implied loss severity in excess of 15.0%.

DBRS Morningstar also has concerns about 3200 North First Street (Prospectus ID#15; 2.7% of the pool balance), which is not on the servicer’s watchlist. The loan is secured by an 85,017-square-foot (sf) partial two-story flex/research and development (R&D) property in San Jose, California, that is fully occupied by NextEV NIO. The sole tenant has an upcoming lease expiration in September 2023 and has provided confirmation that it will vacate at that time. The borrower is actively marketing the property for lease at an asking rental rate of $2.90 per square foot (psf), compared with the in-place rental rate of $2.21 psf. According to the Q1 2023 Cushman & Wakefield Marketbeat report for Silicon Valley R&D properties, North San Jose vacancy averages 12.4% with an asking rental rate of $2.65 psf. Given the near-term rollover risk, DBRS Morningstar analyzed the loan with an elevated probability of default resulting in an expected loss that is approximately 130.0% higher than the pool average.

At issuance, DBRS Morningstar shadow-rated 181 Fremont Street (Prospectus ID#7; 4.1% of the pool balance) as investment grade. The loan is secured by the borrower’s fee interest in a 436,332-sf Class A office building in San Francisco. The property was completed in early 2018 and the collateral space was delivered to the sole occupant, Meta Platforms, Inc. (Meta), formerly Facebook Inc., with a lease expiration in 2031. The lease includes two five-year extensions with no early termination rights. In January 2023, Meta announced it was looking to sublease all of its space at the property, with the space becoming available in June 2023, making it the second-largest block of space available in the San Francisco market. The San Francisco Standard reported that 10 San Francisco tech firms have vacated their spaces over the past year, comprising 2.4 million sf of available office space. While DBRS Morningstar does not expect the net cash flow to be affected in the near term given that Meta’s rent obligation extends beyond the loan’s maturity, the overall risk is elevated given the uncertainty around the ability to absorb the significant amount of space coming available in an environment where supply is outpacing demand. For this review, DBRS Morningstar took a conservative approach by removing the shadow rating and applied a stressed loan-to-value ratio to increase the expected loss in its analysis.

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 (May 17, 2022).

Classes X-A, X-B, and X-D are 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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model Version 1.1.0.0, https://www.dbrsmorningstar.com/research/410913

Rating North American CMBS Interest-Only Certificates (December 19, 2022),
https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022),
https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022),
https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022), https://www.dbrsmorningstar.com/research/402153

Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008

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