Morningstar DBRS Changes Trends on Two Classes of GS Mortgage Securities Trust 2017-GS5

DBRS Limited (Morningstar DBRS) confirmed all credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2017-GS5 issued by GS Mortgage Securities Trust 2017-GS5 as follows:

-- 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 X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class X-C at A (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

Morningstar DBRS changed the trends on Classes E and F to Negative from Stable. All other trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction since Morningstar DBRS’ last review. As of the February 2024 remittance, 28 of the original 32 loans remain in the pool, representing a collateral reduction of 9.6%. In addition, two loans, representing 4.5% of the current pool balance, have defeased. The pool consists primarily of office, retail, and industrial properties representing 40.1%, 19.5%, and 17.8% of the pool balance, respectively. There are six loans on the servicer’s watchlist and three loans in special servicing, representing 30.4% and 10.8% of the pool balance, respectively. The Negative trends reflect the concerns surrounding the three specially serviced loans and the increased rollover risk for the 700 Broadway loan, discussed in detail below.

Morningstar DBRS is projecting a loss of $14.2 million for the smallest of the three loans in special servicing, 604 Mission Street (Prospectus ID#19, 1.7% of the pool), which is secured by a 26,800-square-foot (sf) Class B office building in San Francisco. The loan transferred to special servicing in August 2023 for nonmonetary default related to noncompliance with cash management but subsequently defaulted on its September 2023 loan payment. Occupancy and net cash flow (NCF) have been depressed over the past few years with the trailing nine-month ended period September 30, 2023, financials reporting a negative NCF figure and an occupancy rate of 38.5%. The servicer is currently pursuing foreclosure and, according to the December 2023 appraisal, the property was valued at $5.3 million, which is a significant decline from the issuance value of $25.0 million and well below the outstanding loan balance of $16.6 million. For this review, Morningstar DBRS analyzed the loan with a liquidation scenario, resulting in a loss severity in excess of 85.0%.

The largest loan in special servicing, (Prospectus ID#7, Writers Square, 6.2% of the current pool balance) is secured by a 186,233-sf mixed-use property with street-level retail and an 11-story office tower in Denver, Colorado. The loan has been in special servicing since 2021 because of hardships stemming from the coronavirus pandemic. In October 2022, a pre-negotiation letter was executed and based on the most recent update provided by the special servicer, a reinstatement agreement is being finalized while the servicer continues to monitor the performance of the loan.

Occupancy at the subject has been well below issuance levels with the June 2023 rent roll reporting an occupancy rate of 57.2%. In addition, tenants representing about 20.0% of net rentable area (NRA) have leases scheduled to expire in the next 12 months, including the largest tenant, Blue Moon Digital Inc. (17.2% of NRA), which has a lease expiration in September 2024. The debt service coverage ratio (DSCR) has been below break-even since 2019 and considering performance continues to be depressed, this loan was analyzed with a stressed loan-to-value ratio (LTV) and an increased probability of default (PoD), resulting in an expected loss that was almost triple the pool average.

The second-largest specially serviced loan is 20 West 37th Street (Prospectus ID#16, 2.9% of the pool), which is secured by a 77,100-sf mixed-use property in Midtown Manhattan. The loan was previously modified in September 2022 resulting from challenges from the pandemic and was returned to the master servicer, but it was transferred back to special servicing in January 2024 for legal action pertaining to the misapplication of funds from another property owned by the sponsor. As of the February 2024 reporting, the loan remains current and is cash-managed, although the DSCR has been well below break-even since 2021, suggesting no excess cash will be trapped.

As of the most recent financials provided, YE2022, occupancy was 52.6%, compared with the occupancy at issuance of 100.0%. Occupancy may be further depressed considering one tenant, Colliers International (7.9% of NRA), had a lease expiration in November 2023. A leasing update was requested from the servicer but has not yet been provided; however, $355,000 is currently held in a TI/LC reserve to aid leasing efforts.

According to the October 2022 appraisal, the property was valued at $35.2 million, a decline from the issuance appraised value of $54.0 million. Morningstar DBRS analyzed the loan with a stressed LTV and an elevated PoD, resulting in an expected loss of nearly four times the pool average.

The 700 Broadway loan (Prospectus ID#9, 5.3% of the pool), which is secured by a 13-story 425,000-sf office building in Denver. The loan was added to the servicer’s watchlist in November 2023 because of a cash management trigger tied to the near-term lease expiration of the largest tenant, Elevance Health (86.0% of NRA, expiring December 2024). The servicer has inquired with the borrower for a leasing update, but it is worthy to note that the tenant has four remaining five-year extension options and had invested $20.0 million into the space.

According to the most recent financials, the annualized September 30, 2023, DSCR was 2.45 times (x), compared with the YE2022 figure of 2.11x and issuance figure of 2.27x. Occupancy remained unchanged since 2020 at 94.1% but in the event that Elevance Health vacates its space, occupancy will drop below 10.0%. Of the three tenants currently at the property, both Elevance Health and Education Commission (6.5% of NRA) have lease expirations in December 2024, while the third tenant, Orban, Silberman & Poulos, has a lease expiring in June 2027, just after the loan maturity in January 2027. According to Reis, Inc., office properties in the Midtown submarket reported a Q4 2023 vacancy rate of 15.4%, compared with the Q4 2022 vacancy rate of 17.6%. Given the significant rollover risk in 2024, Morningstar DBRS analyzed the loan with a stressed LTV and increased PoD, resulting in an expected loss that was more than double the pool average.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) https://dbrs.morningstar.com/research/427030.

Classes X-A, X-B, X-C, 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://dbrs.morningstar.com/research/410912)

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

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.

Morningstar DBRS 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.

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

DBRS Limited
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Tel. +1 416 593-5577

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

--North American CMBS Multi-Borrower Rating Methodology, (November 03, 2023),
https://dbrs.morningstar.com/research/422859/north-american-cmbs-multi-borrower-rating-methodology

--Rating North American CMBS Interest-Only Certificates, (December 13, 2023),
https://dbrs.morningstar.com/research/425261/rating-north-american-cmbs-interest-only-certificates

--DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria, (September 22, 2023),
https://dbrs.morningstar.com/research/420982/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

--North American Commercial Mortgage Servicer Rankings, (August 23, 2023),
https://dbrs.morningstar.com/research/419592/north-american-commercial-mortgage-servicer-rankings

--Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, (January 23, 2024),
https://dbrs.morningstar.com/research/427030

--Legal Criteria for U.S. Structured Finance, (December 7, 2023),
https://dbrs.morningstar.com/research/425081/legal-criteria-for-us-structured-finance

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

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