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

DBRS Limited (Morningstar DBRS) 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-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-3FX 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 X-F at B (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

Morningstar DBRS changed the trends on Classes E, F, X-E, and X-F to Negative from Stable. All other classes have Stable trends.

As of the February 2024 remittance, 100 of the original 112 loans remain in the pool with an aggregate balance of $801.9 million, representing 16.5% collateral reduction since issuance. The trend changes reflect Morningstar DBRS’ increased loss projections, which are driven primarily by the loans in special servicing, two of which received updated appraisals since the last rating action indicating continued value decline. The same four loans representing 5.6% of the pool balance have remained in special servicing since last review with no new loans having been transferred. Updated appraisals were received for two of the properties, and Morningstar DBRS maintained its liquidation scenario for all the loans, resulting in estimated losses of over $19.5 million, eroding more than 50.0% of the balance of the unrated Class G. In addition, Morningstar DBRS has identified, several loans on the servicer’s watchlist as having elevated credit risk.

The largest loan in special servicing is 10 South LaSalle Street (Prospectus ID#6, 3.7% of the pool), which is secured by a 781,426-square foot (sf) Class B office property in the center business district (CBD) of Chicago. The 10-year fixed rate loan pays interest-only (IO) and is pari passu with WFCM 2016-NXS5 which Morningstar DBRS also rates. The loan transferred to the special servicer in August 2022 for imminent default, though it has technically remained current since the transfer and cash management is active. The building is within the City of Chicago’s planned LaSalle Street redevelopment project, and as part of the initiative, developers hope to convert existing office space to residential units. The subject was not included on a March 2023 shortlist of properties selected for redevelopment that according to recent reports is expected to begin moving forward in the Spring of 2024.

No updated financials have been provided for this asset since the prior review. Occupancy has been in decline since issuance. According to the YE 2022 OSAR, the property was 75.5% occupied, with leases comprising 11.4% of the net rentable area (NRA) scheduled to expire through 2024. The largest tenant is Chicago Title Insurance occupying 13.6% of the NRA on a lease expiring in March 2025. The remaining tenancy is granular, with no other tenant representing more than 8.0% of the NRA. According to LoopNet, space is currently being marketed at an average rate of $19.0 psf, which is below the Reis reported market average of $29.22 in Q4 2023. There has been no updated appraisal ordered since issuance, as the loan remains current. Given the continued concerns with historical performance trends, lack of leasing activity, and the soft submarket, Morningstar DBRS expects a considerable decline in value for this property. Morningstar DBRS’ analysis includes a liquidation scenario based on a conservative stress to the issuance appraised value, resulting in a projected loss severity exceeding 40%.

Morningstar DBRS identified three additional office loans, representing 7.3% of the pool balance, to be at elevated credit risk. Morningstar DBRS has a cautious outlook on 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. Morningstar DBRS also identified three other loans exhibiting increased tenant rollover risk and declines in performance. Where applicable, Morningstar DBRS increased the probability of default (POD) penalties, and/or applied stressed loan-to-value ratios for these six loans. The weighted-average expected loss for these loans was more than double the weighted-average pool expected loss.

In addition, Morningstar DBRS made a positive adjustment to the loan secured by the Chicago Industrial Portfolio I (Prospectus ID#4, 5.0% of the pool) a portfolio of 18 industrial properties totaling approximately 1.1 million sf throughout the greater Chicago area. The adjustments were made to reflect the loan’s consistent improvements in performance year over year, reporting increases in NCF and DSCR well above issuance expectations as well as the improving submarket outlook.

ENVIRONMENTAL, SOCIAL, AND 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 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-D, X-E, 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 Morningstar DBRS.

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

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799.

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

The credit ratings assigned to Classes B and E materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS 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 uncertain loan-level event risk given the conservative approach for the analysis of the specially serviced loans. Morningstar DBRS revised the trend on Class E to Negative from Stable to reflect concerns with these loans.

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
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://dbrs.morningstar.com/about/methodologies.

--North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, (https://dbrs.morningstar.com/research/428797)
--Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261
--DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982
--North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
--Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

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. (July 17, 2023)

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