Morningstar DBRS Downgrades Credit Ratings on Five Classes of COMM 2016-CCRE28 Mortgage Trust, Changes Trends on Five Classes to Negative From Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2016-CCRE28 issued by COMM 2016-CCRE28 Mortgage Trust as follows:

-- Class X-D to BB (low) (sf) from BBB (low) (sf)
-- Class F to B (high) (sf) from BB (high) (sf)
-- Class G to CCC (sf) from BB (low) (sf)
-- Class X-E to CCC (sf) from B (sf)
-- Class H to C (sf) from B (low) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-HR at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-HR at AAA (sf)
-- Class XP-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-C at BBB (sf)
-- Class E at BBB (low) (sf)

Morningstar DBRS changed the trends on Classes D, X-C, E, X-D, and F to Negative from Stable. All other trends are Stable, with the exception of Classes G, X-E, and H, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades reflect the increased loss projections tied to the sole specially serviced loan, 1155 Market Street (Prospectus ID#8, 5.6% of the pool), which transferred in March 2024 for imminent monetary default. While an updated appraisal has not been received since issuance, the office property in San Francisco is dark after a renewal with the City and County of San Francisco fell through, implying a significant decline in value and increased maturity risk as the loan is scheduled to mature in January 2026. With this review, Morningstar DBRS considered a conservative liquidation scenario based on an updated dark value, covered in more detail below, resulting in a total implied loss of nearly $27.0 million, which would fully erode the nonrated Class J and partially erode the rated Class H certificate. The Negative trends reflect Morningstar DBRS' concerns about various loans exhibiting increased credit risk, as well as the increased credit risk profile of loans backed by office properties, which is the largest property concentration, comprising 31.9% of the current pool balance. Morningstar DBRS analyzed five loans, representing 20.4% of the pool, with stressed loan-to-value ratios (LTVs) and/or elevated probabilities of default (PODs) to increase the expected loss (EL) at the loan level as applicable. The resulting weighted-average (WA) EL for these loans was more than two times (x) the pool's WA figure.

The credit rating confirmations are reflective of the otherwise stable performance of the remaining loans in the pool, which, based on the most recent year-end financials, reported a WA debt service coverage ratio (DSCR) of 1.89x. As of the July 2024 reporting, 43 of the original 49 loans remained in the pool, with an aggregate principal balance of $855.8 million, representing a collateral reduction of 16.7% since issuance as a result of scheduled loan amortization, repayment, and liquidation. To date, four loans have been liquidated from the pool, resulting in $9.3 million in realized losses to the trust, which has been contained to the nonrated Class J certificate. Nine loans, representing 18.1% of the pool, are secured by collateral that has been fully defeased. There are eight loans, representing 21.3% of the pool, on the servicer's watchlist for a variety of reasons, including increased vacancy, declines in performance, upcoming maturity, and deferred maintenance. Based on the most recent year-end financials, the loans on the servicer's watchlist reported a WA DSCR of 1.18x.

The 1155 Market Street loan is secured by a 103,487-square-foot (sf) portion of an 11-story Class A office building in San Francisco's South of Market West submarket. At issuance, the collateral was fully leased to the City and County of San Francisco through January 2023, which included two five-year extension options at fair market value. While the tenant had initially exercised its first option extending through January 2028, the San Francisco Budget and Finance Committee met in September 2023 and voted to retroactively request a modification to the lease's terms given the high rents, which was ultimately rejected. Lease negotiations remained active for a period of time, but the loan was transferred to special servicing ahead of the tenant's departure date in May 2024 and a receiver was appointed in June 2024. Given the tenant's abrupt departure, only $1.3 million had been collected in reserves as of July 2024, with no leasing prospects indicated as of the date of this press release. While an updated appraisal has not yet been made available, Morningstar DBRS believes the property value has deteriorated significantly given the building's vacancy, soft submarket conditions, and the current office landscape. As of Q2 2024, office properties in the San Francisco market reported a vacancy rate of 36.8%, while South of Market West reported a higher figure at 49.8%.

To determine the dark value, Morningstar DBRS assumes that the property is fully vacant and that after two years of downtime, the property is re-leased to a market occupancy. A concluded market rental rate of $63.34 per sf (psf) was determined based on the Reis submarket data, with a stabilized vacancy rate of 25.0%. Expenses were based on a 44.5% expense ratio, in line with historical figures. Morningstar DBRS then applied a 9.0% stressed capitalization rate, supported by market trends and incorporating a 100-basis-point dark value adjustment to account for the time and risk to retenant the space. Less the projected costs to stabilize the property, including downtime and leasing costs, the resulting dark value was $25.0 million, reflecting an LTV of 192%. In its analysis, Morningstar DBRS liquidated the loan from the trust, resulting in an implied loss severity in excess of 55.0%.

Another notable loan, 32 Avenue of the Americas, is secured by a 1.2 million-sf dual office and data center property in Manhattan's Tribeca district. The $425 million loan has a pari passu structure with pieces securitized across two Morningstar DBRS-rated deals, JPMCC 2015-C33 and JPMCC 2017-JP6. The loan was added to the servicer's watchlist in April 2023 because of a decline in occupancy, which has trended downward year over year for the past several years following the downsizing and departure of prominent tenants. As of the December 2023 rent roll, the property was 60.5% occupied, compared with 95% at issuance. Consequently, the loan's DSCR has similarly declined, with the DSCR for the trailing 12 months ended March 31, 2024, reported at 0.98x, compared with the issuance DSCR of 1.88x. In addition, near-term lease rollover is elevated as tenant leases representing approximately 25.0% of the net rentable area (NRA) are scheduled to expire within the next 12 months. According to Reis, as of Q1 2024, office properties in the South Broadway submarket reported a vacancy rate of 13.6%, with an average rental rate of $72.48 psf. The loan was equipped with a cash management account, to be activated at a DSCR trigger of 1.15x; however, given that the loan's coverage is below breakeven, it is unlikely that a meaningful amount of cash will be swept.

The sponsor, Rudin Management, is currently advertising 41.6% of the NRA as available for leasing at an average rental rate of $73.79 psf, which is slightly higher than the current average in-place rental rate of $71.74 psf according to the December 2023 rent roll. Although the subject is a prominent telecom building in Manhattan, with infrastructure that has historically made it a popular location for data center and telecom tenants, media sources indicate that the sponsor is exploring options to convert some space to retail use in the hopes of attracting leasing activity. However, given that the sponsor recently spent approximately $100 million renovating a nearby asset at 80 Pine Street with little notable impact on occupancy or value, combined with observed challenges in the current office landscape, the building's age, consistently declining occupancy, and a history of tenant departures/downsizing, Morningstar DBRS remains pessimistic about the property's near-term leasing prospects. Morningstar DBRS expects the borrower to face challenges in securing refinancing at loan maturity next year. Based on these factors, Morningstar DBRS analyzed this loan with an elevated LTV and a POD adjustment to increase the EL to nearly 3.5x the pool's WA EL.

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

Classes X-A, X-B, X-HR, XP-A, X-B, X-C, X-D, and X-E 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 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 info-DBRS@morningstar.com.

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 Limited
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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 version 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- 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 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 info-DBRS@morningstar.com.