DBRS Morningstar Confirms Credit Ratings on all Classes of BANK 2021-BNK35

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-BNK35 issued by BANK 2021-BNK35 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-4-1 at AAA (sf)
-- Class A-4-2 at AAA (sf)
-- Class A-4-X1 at AAA (sf)
-- Class A-4-X2 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-5-1 at AAA (sf)
-- Class A-5-2 at AAA (sf)
-- Class A-5-X1 at AAA (sf)
-- Class A-5-X2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-S-1 at AAA (sf)
-- Class A-S-2 at AAA (sf)
-- Class A-S-X1 at AAA (sf)
-- Class A-S-X2 at AAA (sf)
-- Class B at AAA (sf)
-- Class B-1 at AAA (sf)
-- Class B-2 at AAA (sf)
-- Class B-X1 at AAA (sf)
-- Class B-X2 at AAA (sf)
-- Class X-B at AA (sf)
-- Class C at AA (low) (sf)
-- Class C-1 at AA (low) (sf)
-- Class C-2 at AA (low) (sf)
-- Class C-X1 at AA (low) (sf)
-- Class C-X2 at AA (low) (sf)
-- Class X-D at A (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (high) (sf)
-- Class X-FG at BBB (low) (sf)
-- Class F at BBB (low) (sf)
-- Class X-H at BB (high) (sf)
-- Class G at BB (high) (sf)
-- Class H at BB (sf)
-- Class X-J at B (high) (sf)
-- Class J at B (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar expectations, as exhibited by a healthy weighted-average pool debt service coverage ratio (DSCR) of 3.05 times (x) and no loans in special servicing. As of the September 2023 remittance, all 76 of the original loans remain in the pool with a marginal collateral reduction of 0.7% since issuance. To date, no loans have defeased from the pool. There are five loans, representing 1.6% of the pool balance, on the servicer’s watchlist, four of which are being monitored for deferred maintenance and one for failure to provide proof of insurance. The pool is concentrated with loans backed by office and retail properties that make up 27.5% and 25.0% of the pool balance, respectively.

The loans backed by office properties have generally illustrated stable performance since issuance. There is a notable concentration of government- and city-affiliated tenants among these loans, with three loans in the top 15 (accounting for 10.6% of the pool balance) that were 100% leased to government or city agencies. However, given the challenges faced by the office sector as of late with low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics, DBRS Morningstar applied stress scenarios to its analysis, where applicable. This includes the One Trinity Center (Prospectus ID#11, 2.9% of the pool balance), which is secured by a Class B office property located in downtown San Francisco. The $40.0 million fixed-rate loan pays interest-only (IO) for the entirety of its 10-year term. The property was developed by the sponsor in 1990 and at issuance, it was noted that approximately $13.0 million of renovations were completed since 2017. The subject has exposure to government tenants, which is ideal considering the subject is in close proximity to the San Francisco City Hall. According to the June 2023 rent roll, occupancy was reported at 81.2% with tenants representing 56.9% of the net rentable area (NRA) rolling over in the next 12 months, including the largest tenants, City and County of San Francisco (27.4% of NRA, lease expiry in July 2024); the San Francisco Law Library (14.8% of the NRA, lease expiry in June 2023); and San Francisco City Health Service System (14.4% of the NRA, lease expiry in March 2024). However, the borrower is close to finalizing a renewal for San Francisco Law Library that would extend the lease to June 2028. Furthermore, per the Reis Q2 2023 report for the Van Ness/Civic Center submarket, the average vacancy rate was 28.7%, a steep increase from the Q1 2023 vacancy of 14.8%; however, it is expected to decrease to 14.4% in the next five years.

According to YE2022 financial reporting, the subject reported a net cash flow (NCF) and DSCR of $4.2 million and 3.55x, respectively, compared with the DBRS Morningstar NCF and DSCR of $3.4 million and 2.88x, respectively. While performance to date remains stable, the high rollover risk as well as the soft San Francisco office market are concerning. As such, DBRS Morningstar applied a stressed loan-to-value ratio and an elevated probability of default in its analysis for this review, resulting in an expected loss nearly triple the deal average.

At issuance, DBRS Morningstar shadow-rated three loans as investment-grade: Four Constitution (Prospectus ID#3, 4.0% of the pool balance), River House Coop (Prospectus ID#4 3.8% of the pool balance), and Three Constitution (Prospectus ID#12, 2.7% of the pool balance). These loans continue to exhibit strong credit characteristics consistent with investment-grade shadow ratings. The Four Constitution and Three Constitution loans are backed by office properties that are 100% occupied by the United States Department of Justice on 15-year leases with no termination options through maturity, while the River House Coop loan is backed by an exclusive co-operative apartment building in Manhattan that is of excellent property quality. With this review, DBRS Morningstar maintained shadow ratings on all three of the loans.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

Classes X-A, X-B, X-D, X-FG, X-H, and X-J 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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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].