DBRS Morningstar Confirms All Ratings on Wells Fargo Commercial Mortgage Trust 2016-C32

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-C32 issued by Wells Fargo Commercial Mortgage Trust 2016-C32 as follows:

-- Class A-3 at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-3FX at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class X-D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (sf)
-- Class F at B (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. Per the July 2023 remittance, 100 of the original 112 loans remain in the pool, with an aggregate principal balance of $810.6 million, representing a collateral reduction of 15.6% since issuance. Twenty-one loans, representing 11.6% of the pool, are fully defeased. In addition, loans representing 19.4% of the current pool balance are on the servicer’s watchlist and four loans, representing 5.5% of the current pool balance, are in special servicing. Based on the most recent year-end financials, the pool reported a healthy debt service coverage ratio (DSCR) of 1.87 times (x) compared with the prior year’s DSCR of 1.67x.

The largest loan in special servicing, 10 South LaSalle Street (Prospectus ID#6; 3.7% of the current pool balance), was analyzed with a liquidation scenario for this review, given the soft submarket fundamentals, low occupancy rate, and declining cash flows. This resulted in implied losses of more than $10.0 million. The remaining three loans in special servicing, which collectively represented 1.8% of the current pool balance, were also analyzed with liquidation scenarios, given the assets were real-estate owned. The projected loss for all four loans was in excess of $12.0 million, eroding the first-loss Class G certificate by approximately 35.0%.

The pool is concentrated by property type, with retail and office properties comprising 28.6% and 14.8% of the pool, respectively. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. In the analysis for this review, loans backed by office and other properties that were showing declines from issuance or otherwise exhibiting increased risks from issuance were analyzed with stressed scenarios to increase the expected loss (EL) as applicable. As a result, office properties exhibited a weighted-average (WA) EL that was 49.0% greater than the pool average.

The 10 South LaSalle Street loan is secured by a 781,000-square foot (sf), Class B office building in the Central Loop submarket of Chicago. This loan is pari passu with a loan secured in the Wells Fargo Commercial Mortgage Trust 2016-NXS5 transaction, which is also rated by DBRS Morningstar. Despite the property having undergone $17.8 million worth of renovations over the past five years aimed at making it more competitive, the occupancy rate has remained depressed since 2020 and was at 75.5% as of the March 2023 reporting.

The loan transferred to special servicing in August 2022 for imminent default, however, as of the most recent remittance, the loan remains current. The special servicer remains in contact with the borrower to evaluate next steps, with a resolution that was targeted for June 2023.

The YE2022 net cash flow (NCF) was reported at $3.7 million, a significant decline from the YE2020 and issuance NCF figures of $8.1 million and $10.7 million, respectively. Likewise, the DSCR remains stressed, with the YE2022 figure below breakeven at 0.79x. Per the December 2022 rent roll, the property was 75.5% occupied compared with the YE2020 and issuance occupancy rates of 72.0% and 89.0%, respectively. Rollover risk is moderate for the next 12 months, with tenant leases representing 7.8% of net rentable area (NRA) scheduled to roll. The largest three tenants at the property are Chicago Title Co. (13.6% of NRA; lease expiry in March 2025), Amwins Brokerage of Illinois (7.4% of NRA; lease expiry in August 2027), and Clausen Miller PC (5.4% of NRA; lease expiry in December 2025). As of December 2022, the average rental rate at the property was $28 per square foot (psf), which is below the $32 psf figure for the Central Loop submarket, according to Reis.

The building is within the City of Chicago’s planned LaSalle Street redevelopment project, which is seeking to create a more mixed-use neighborhood along the LaSalle corridor in the Central Loop. As part of the initiative, developers plan to convert existing office space to residential units, however, the collateral is not included in the preliminary pool of participating properties. The subject property was most recently appraised in December 2015 at a value of $166.5 million; however, given the declines in occupancy rate and cash flow, coupled with the diminished investor appetite for this property type, the asset’s value has likely declined significantly, elevating the loan’s leverage and credit risk.

It is worth noting that a January 2023 appraisal obtained for 135 South LaSalle Street, a Class A office building 0.1 miles from the subject property, indicated a decline in value in excess of 70.0% from issuance following a precipitous decline in occupancy rate to below 20.0%. For this review, DBRS Morningstar analyzed the loan with a liquidation scenario based on a haircut to the issuance value, with consideration given to the outdated appraisal and soft market conditions, which resulted in a loss severity in excess of 30.0%.

The largest loan on the servicer’s watchlist, Technology Station (Prospectus ID#3; 5.9% of the pool), is secured by a 95,000-sf suburban office property in Redwood City, California. The loan was added to the watchlist in November 2022 because of a drop in occupancy following the departure of the property’s third-largest tenant, GoFundMe (previously 21.0% of NRA), as its lease expired in August 2022.

The annualized NCF for the trailing three months ended March 30, 2023, was reported at $4.3 million (representing a DSCR of 1.48x) while the YE2022 NCF was reported at $7.5 million (DSCR of 2.60x) compared with the YE2021 NCF of $7.6 million (a DSCR of 2.62x) and the issuance NCF of $5.7 million (a DSCR of 1.96x). According to the March 2023 rent roll, the property was 71.0% occupied, a decrease from the YE2022 occupancy rate of 79.3% and a further decline from the YE2021 occupancy rate of 100.0%. The departures of GoFundMe and Physiatry Medical Group (previously 8.4% of NRA, lease expired December 2022) were the main drivers for the decrease in occupancy rate and cash flow. Biomea Fusion Inc. was expected to backfill GoFundMe’s space but its lease was not executed and the space remains vacant. For this review, DBRS Morningstar applied a stressed loan-to-value ratio and increased the probability of default in the analysis, resulting in an EL that was 40.0% higher than the pool average.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Classes X-A, X-D, X-E, and X-F 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 credit ratings are subject to surveillance, which could result in credit 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 credit rating assigned to Class B materially deviates from the credit rating implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is due to the uncertain loan-level event risk given the conservative approach for the analysis of the specially serviced loans but overall, the credit risk profile of the pool is generally stable as depicted by the healthy performance metrics.

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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit 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 v 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 (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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