DBRS Morningstar Confirms Ratings on All Classes of COMM 2016-CCRE28 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-CCRE28 issued by COMM 2016-CCRE28 Mortgage Trust as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-HR at AAA (sf)
-- Class A-M at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-HR at AAA (sf)
-- Class XP-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-C at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class X-D at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class G at BB (low) (sf)
-- Class X-E at B (sf)
-- Class H at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance since DBRS Morningstar’s last review, with a small concentration of loans on the servicer’s watchlist and no loans in special servicing or delinquent as of the most recent remittance. Cash flows are overall stable, with the largest 15 loans in the pool generally reporting cash flows in line with the issuance figures. Based on the most recent year-end financials, the pool reported a healthy debt service coverage ratio (DSCR) of 2.05 times (x).

As per the August 2023 remittance, 43 of the original 49 loans remain in the pool, with an aggregate principal balance of $865.5 million, representing a collateral reduction of 15.7% since issuance. There are nine loans, representing 18.5% of the pool, secured by collateral that are fully defeased. Five loans, representing 18.3% of the trust balance, are on the servicer’s watchlist, primarily because of low DSCRs, recent or upcoming lease expirations, and/or deferred maintenance items. To date, four loans have been liquidated from the pool, resulting in realized losses to the trust of $9.3 million, which have been contained to the nonrated Class J certificate, which had an issuance balance of $29.5 million. The losses have generally been offset by continued amortization of loans and defeasance held in the trust, with the defeasance-adjusted credit enhancement for the lowest-rated certificate increasing slightly since issuance.

The pool is concentrated by property type, with loans backed by office and retail properties comprising 31.9% and 23.5% of the pool, respectively. The majority of loans secured by office properties in this transaction continue to exhibit healthy credit metrics, reflecting a weighted-average debt yield of 10.6% based on the most recent financials available. However, DBRS Morningstar has a cautious outlook for this asset type as sustained upward pressure on vacancy rates in the broader office market may challenge landlords’ efforts to backfill vacant space, and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. DBRS Morningstar identified four office loans other than the one noted below, representing 17.6% of the pool, that are exhibiting increased credit risks from issuance and applied stressed loan-to-value (LTV) ratios and, where applicable, increased the probability of default (POD) penalties for these loans to increase the expected loss in the analysis.

The largest loan on the servicer’s watchlist, 32 Avenue of the Americas (Prospectus ID#4; 7.7% of the pool balance), is secured by a 1.2 million-square-foot (sf) dual office and data center property in Manhattan’s Tribeca district. The 10-year interest-only (IO) loan is scheduled to mature in November 2025 and is one of five pari passu pieces of a $425.0 million whole loan. The loan was added to the servicer’s watchlist in April 2023 because of a decline in the occupancy rate. As of the February 2023 rent roll, the property was 61.8% occupied. Occupancy has been falling precipitously over the last several years, ending 2021 at 75.6% and 2022 at 70.0%, down from 95.0% at issuance.

The largest tenants remaining at the subject property include Telx, LLC (12.4% of the net rentable area (NRA); lease expiry in July 2033), Dentsu Holdings USA Inc. (5.9% of the NRA; lease expiry in August 2025), and CenturyLink Communications, LLC (5.8% of the NRA; lease expiry in August 2040). Near-term rollover risk is minimal, with leases representing only 1.0% of the NRA scheduled to expire over the next 12 months. Approximately 3.0% of sublease space is listed as available on Optimal Space as two current tenants that had previously expanded have since condensed their footprints at the property. The YE2022 DSCR was reported to be 1.78x, down from 1.96x at YE2021 and 2.01x at YE2020. The loan is equipped with a cash management account that will be activated at a DSCR trigger of 1.15x for two consecutive quarters.

The sponsor, Rudin Management (Rudin), acquired the subject property in 1999 and has reportedly spent $10.0 million on upgrading the building interiors, exteriors, and systems, indicative of strong sponsor commitment to the property. Rudin is currently advertising 38.8% of the vacant space as available for leasing at an average rental rate of $73.40 per sf (psf), which is higher than the current average in-place rental rate of $63.70 psf. As per Reis, office properties in the South Broadway submarket reported a Q2 2023 vacancy rate of 14.2% with an average asking rent of $72.56 psf, compared with the Q1 2022 vacancy rate of 9.0% and average asking rent of $69.82 psf. Given the unfavorable conditions of the current office property market, with several companies downsizing and year-over-year declines in occupancy since the onset of the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar expects the stabilization period for the property could be longer than originally anticipated. Given these factors, in the analysis for this review, DBRS Morningstar applied both an LTV and a POD stress to increase the 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/416784 (July 4, 2023).

Classes X-A, X-HR, XP-A, X-B, X-C, X-D, and X-E are 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 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
DBRS Tower, 181 University Avenue, Suite 700
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].