Morningstar DBRS Downgrades Credit Ratings on Four Classes of J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1MEM, Changes Trends to Negative on All Classes

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2021-1MEM as follows:

-- Class C to BBB (sf) from A (low) (sf)
-- Class D to BB (low) (sf) from BBB (low) (sf)
-- Class E to B (sf) from BB (low) (sf)
-- Class HRR to B (low) (sf) from B (high) (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the following classes:

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (low) (sf)

Morningstar DBRS changed the trends on all classes to Negative.

All credit ratings were removed from Under Review with Negative Implications, where they were placed on April 15, 2024, as part of Morningstar DBRS' review of transactions secured by office properties within its North American commercial mortgage-backed securities single-asset/single-borrower (NA CMBS SASB) portfolio. The review was prompted by Morningstar DBRS' view that a shift in the use and demand for office space has been observed in the last few years. Amid an increase in remote work and hybrid schedules, tenant demand in urban markets such as those most frequently represented in the NA CMBS SASB space has been the most resilient for those higher-quality buildings that offer extensive amenity packages and are located within areas with proximity to transportation hubs and other nearby draws for commuters and city dwellers alike. These trends are expected to be sustained for the long term and the ripple effects in increased tenant improvement costs, capital improvement expectations, and decreased demand for some markets and neighborhoods will continue to influence investment activity for the office sector as a whole. For more information regarding the approach and analysis conducted, please refer to the press release "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties" published on April 15, 2024.

At the conclusion of the April 2024 review, several transactions, including the subject transaction, remained Under Review with Negative Implications. This generally reflected the existence of evolving factors for those respective credits for which Morningstar DBRS identified a need for more information to be gathered to inform the analysis. With this review for the subject transaction, Morningstar DBRS has resolved the Under Review with Negative Implications status. A full detail of the credit rating actions and ratings rationale are outlined below.

The credit rating downgrades reflect the downward pressure in the loan-to-value (LTV) sizing benchmarks following updates to Morningstar DBRS' analysis with this review, which were made to capture the secular shift noted above in addition to the upcoming departure of the largest tenant at the collateral property for the underlying loan, InterSystems (59.5% of net rentable area (NRA)), which will vacate its space in June 2025.

The loan structure provides for a cash flow sweep to be initiated in certain circumstances involving the InterSystems lease, which was activated in December 2023. InterSystems was required to pay a termination fee, which together with the cash flow sweep, should provide sufficient funds to re-lease the property to market levels; however, the execution risk of such a large lease-up is significant, particularly in the current environment. While the property benefits from its location adjacent the MIT campus and institutional sponsorship provided by Metropolitan Life Insurance Company and Norges Bank Investment Management, which appears committed to re-tenanting the building, only one lease (6.2% of NRA) has been signed in the eight months since InterSystems' notice of termination, with no other prospective tenants known to the servicer as of the date of this press release. Given the unknowns regarding the leasing momentum and general demand for the space to be vacated, Morningstar DBRS has assigned Negative trends to all classes.

Given property operations are expected to remain stable through InterSystems' departure in June 2025, Morningstar DBRS derived an as-is NCF (excluding InterSystems), which indicates that the property could support debt service payments on Classes A, B, C, and D before falling below breakeven. In addition, the recovery implied by Morningstar DBRS' dark value analysis, as further described below, suggests Classes A and B remain insulated against liquidated losses. These factors contributed to the credit rating confirmations for Classes A and B.

The underlying loan for the subject transaction is collateralized by One Memorial Drive, a Class A, 17-story office building totaling 409,422 square feet (sf) directly adjacent to the MIT campus in Cambridge, Massachusetts. The property includes a five-story, approximately 300-stall parking garage, and amenities include a fitness center, full-service cafe, onsite Blue Bike station, EV chargers, and bike storage. The property was built in 1985 and renovated in 2018, with approximately $49.0 million spent on capital improvements, including elevator modernizations, HVAC upgrades, roof replacements, and tenant improvements for the two largest tenants.

Whole loan proceeds of $414.0 million include six pari passu senior notes with an aggregate initial principal balance of $299.3 million and one junior note with an initial principal balance of $114.7 million. The subject transaction totals $255.8 million and consists of one senior note with a principal balance of $141.5 million and the junior note. The remaining notes are securitized in the BMARK 2021-B30 ($95.0 million) and BMARK 2021-B31 ($63.2 million) transactions, neither of which are rated by Morningstar DBRS. The loan is interest-only (IO) throughout its 10-year term with a scheduled maturity in October 2031.

As of March 2024, the property was 98.5% occupied. The largest tenants at the property are InterSystems and Microsoft Corporation (Microsoft) (38.3% of NRA). InterSystems has been headquartered at the property since 1987, having executed multiple expansions in the building since. As noted above, the tenant gave notice of its intention to terminate its lease following a failed attempt to further expand space within the subject building. The tenant paid a termination fee of $11.7 million with excess cash flow sweep expected to accumulate to a balance of approximately $27.6 million by June 2025, all of which can be used for accretive leasing costs.

Microsoft is considered an investment-grade tenant and has a lease scheduled to roll in June 2028, roughly two years prior to the loan's scheduled maturity, and there are no termination options available in Microsoft's lease. It has been in occupancy since 2007 and has one 10-year extension option remaining. The borrower has signed one lease with MIT for the entire second floor (25,298 sf) on a 10-year term beginning January 2026. The tenant will pay an initial rate of $96 per square foot (psf), well above the below market rate InterSystems is paying at $89.51 psf. MIT will receive 10 months of free rent and a tenant improvement package of $120 psf. According to Q1 2024 Reis data, office properties in the Cambridge/Charlestown/Somerville submarket reported an average asking rental rate of $60.08 psf with vacancy at 12.0%. Class A properties within a one-mile radius of the subject reported figures of $102.32 psf and 9.6%, respectively. The property also falls in the Kendell Square submarket of East Cambridge, which most recently reported a vacancy rate under 3.0%.

As of YE2023, the loan reported an NCF of $30.0 million (a debt service coverage ratio of 2.65 times), in line with historical reporting. In its analysis for this review, Morningstar DBRS derived a stabilized NCF of $25.2 million, which considered the departure of InterSystems and gave credit to the expected sum of reserves upon its departure, releasing the space to market, less the associated MIT leasing costs. The long-term credit-tenant treatment to Microsoft was maintained given its below market rents and AAA credit rating. Morningstar DBRS assumed a vacancy rate of 12.0% based on the greater submarket data, an increase from the 5.0% economic vacancy assumed when ratings were initially assigned in 2021; leasing reserves are expected to cover the associated leasing costs. With the upside in revenue, Morningstar DBRS assumed a stabilization period and inflated operating expense line items by 10% over their current levels. Tenant improvement (TI) assumptions were also increased to $120 psf for new TIs and $60 psf for renewal based on a 10-year term, respectively, a significant increase from the blended rate of $6 psf and $31 psf when ratings were assigned in 2021, respectively, informed by the recent lease with MIT.

The concluded Morningstar DBRS NCF was $25.2 million, a haircut of 9.0% from the Morningstar DBRS NCF of $27.7 million derived when credit ratings were assigned in 2021. Morningstar DBRS increased the capitalization rate from 6.25% to 6.50% with this review to conclude a value of $388.2 million, down from the Morningstar DBRS value of $443.8 million derived in 2021 and issuance appraised value of $828.0 million. The implied LTV based on the updated Morningstar DBRS value and the trust debt is 104.9%. Morningstar DBRS also applied cumulative positive qualitative adjustments of 5.0% for property quality and market fundamentals. In previous years, Morningstar DBRS had given a 3.0% positive qualitative adjustment for low cash flow volatility; however, given the anticipated disruption to cash flow, that credit was removed with this review. The updated Morningstar DBRS value and implied LTV resulted in moderate downward pressure across the capital stack, supporting the credit rating downgrades and Negative trends as outlined above.

The Morningstar DBRS credit ratings assigned to Classes A, B, C, and E are higher than the results implied by the LTV sizing benchmarks by three or more notches. These variances are warranted given the loan structure, which is expected to collect sufficient funds to re-lease the property, coupled with the property's location adjacent the MIT campus situated in a strong market characterized by low vacancy and limited construction of new product, and an institutional loan sponsor who appears committed to re-tenanting the property. In addition, the Morningstar DBRS as-is NCF derived as part of this review indicates that the debt service coverage would remain above breakeven for the investment-grade rated classes should leasing momentum be slow to gain traction. Morningstar DBRS also considered a dark value in excess of $390.0 million, which suggests a recovery for those same classes should the loan default and the servicer ultimately liquidate the asset. Given the unknowns and increased risks from issuance, Morningstar DBRS assigned Negative trends to all classes and will continue to monitor the leasing progress.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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

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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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 Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024; https://dbrs.morningstar.com/research/436004)
Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

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

Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205)

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).

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