Morningstar DBRS Downgrades Seven Classes of Citigroup Commercial Mortgage Trust 2015-GC31

DBRS, Inc. (Morningstar DBRS) downgraded the credit ratings on seven classes of Commercial Mortgage Pass-Through Certificates, Series 2015-GC31 issued by Citigroup Commercial Mortgage Trust 2015-GC31 as follows:

-- Class X-A to AA (high) (sf) from AAA (sf)
-- Class A-S to AA (sf) from AAA (sf)
-- Class B to BBB (sf) from AA (low) (sf)
-- Class C to CCC (sf) from A (low) (sf)
-- Class PEZ to CCC (sf) from A (low) (sf)
-- Class D to C (sf) from BB (sf)
-- Class E to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class F at C (sf)
-- Class G at C (sf)

Trends on Classes A-S, B, and X-A are Negative. Classes C, PEZ, D, E, F, and G have ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. All other classes have Stable trends.

The credit rating downgrades reflect the increased loss projections for loans in special servicing primarily driven by 135 South LaSalle (Prospectus ID#1; 15.6% of the pool), the largest loan in the pool. At the last credit rating action in March 2023, Morningstar DBRS downgraded Classes D, E, F, and G largely as a result of loss projections for the 135 S LaSalle loan. However, since that time, a new appraisal, dated January 2024, has been obtained, indicating a higher-than-expected deterioration in property value. As a result, Morningstar DBRS’ loss projections have increased, further suggesting trust losses are likely through Class D. Furthermore, five loans have been added to the servicer’s watchlist for a total of six loans, representing 14.3% of the pool, further stressing Morningstar DBRS’ weighted-average (WA) expected loss (EL) for the remaining pool.

The largest loan in the pool is secured by 135 South LaSalle, a Class A office property commonly known as the Field Building, in the central business district of Chicago. The loan transferred to special servicing in November 2021 for payment default after the former largest tenant, Bank of America (previously 62.3% of the net rentable area (NRA)), vacated the majority of its space at the July 2021 lease expiration, bringing the occupancy rate down to just under 20%. A January 2024 appraisal valued the property at $67.7 million compared with the January 2023 value of $90.0 million and the issuance value of $330.0 million. Since the last credit rating action, the occupancy rate has slipped further to 16% as of the YE2023 operating statement analysis report and additional leases are scheduled to roll by YE2024. Chicago’s Central Loop submarket continues to report an elevated vacancy rate of 14.1% as of Q4 2023, according to Reis. Although this is 10 basis points lower than the previous quarter, vacancy is projected to tick up over the next few years. Additionally, loan level advances have increased by more than $6 million in the same time period. The January 2024 appraised value is well below the total loan exposure of approximately $125.0 million. The subject property was selected as one of five finalists for the LaSalle Reimagined redevelopment project in March 2023. The redevelopment program is geared toward transforming dated office space into residential housing, of which a portion of the units will be designated for affordable housing. According to recent news reports, the current mayoral administration plans to move forward with the project in the Spring of 2024, aiming to provide city funding to aid the redevelopment of select properties. While the potential for redevelopment is promising, the timing and extent to which funding will be available remains unclear. Morningstar DBRS analyzed this loan with a liquidation scenario based on a haircut to the January 2024 value, resulting in a loss severity approaching 65.0%.

Outside of the loans in special servicing, Morningstar DBRS identified nine other loans, representing 28.3% of the deal balance, as being at elevated credit risk related to concentrated rollover, performance declines, and submarket pressures. Four of these loans, representing 19.3% of the pool balance, are backed by office properties. Morningstar DBRS 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. Where applicable, Morningstar DBRS increased the probability of default penalties and/or applied stressed loan-to-value ratios for these nine loans. The WA EL for these loans was more than 15% higher than the WA EL for the pool. The WA EL for the office-backed loans in particular was more than 20.0% higher than the WA EL for the pool.

As of the March 2024 remittance, 47 of the original 50 loans remain in the trust with an aggregate balance of $639.5 million, representing a collateral reduction of 11.6% since issuance. The pool is primarily concentrated in mixed used and office properties, which comprise 37.7% and 21.5% of the pool balance, respectively. A total of six loans, representing 24.7% of the pool, are on the servicer’s watchlist, and 19 loans, representing 21.7% of the pool, are fully defeased. All of the remaining loans are scheduled to mature within the next 12 to 18 months. While Morningstar DBRS expects the majority of outstanding loans will refinance, a number exhibit signs of elevated maturity default risk. As noted above, Morningstar DBRS adjusted its analysis to reflect these concerns, further supporting the downgrades and negative trends. Should additional loans default as they near maturity or should assets wallow in special servicing, Morningstar DBRS’ loss projections may increase.

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) at https://dbrs.morningstar.com/research/427030.

Class X-A is an interest-only (IO) certificate that references 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 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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, Inc.
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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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279, (July 17, 2023).

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)

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