Morningstar DBRS Downgrades Four Classes of JPMCC Commercial Mortgage Securities Trust 2017-JP7, Changes Trends on Three Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2017-JP7 issued by JPMCC Commercial Mortgage Securities Trust 2017-JP7 as follows:

-- Class D to BBB (low) (sf) from A (low) (sf)
-- Class E-RR to BB (low) (sf) from BBB (low) (sf)
-- Class F-RR to B (low) (sf) from BB (sf)
-- Class G-RR to CCC (sf) from B (high) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)

Morningstar DBRS changed the trends on Classes B, X-B, and C to Negative from Stable. The trends on Classes D, E-RR, and F-RR remain Negative. The trends on all other classes are Stable with the exception of Class G-RR, which now has a rating that does not typically carry a trend in commercial mortgage backed securities (CMBS) credit ratings.

The credit rating downgrades on Classes D, ERR, FRR, and GRR are reflective of Morningstar DBRS' increased loss projections, driven by two of the three loans in special servicing: First Stamford Place (Prospectus ID #5; 8.7% of the pool) and Springhill Suites Newark Airport (Prospectus ID#13; 2.4% of the pool). Since the last credit rating action, First Stamford Place transferred to special servicing and both loans have reported new appraised values exhibiting larger than anticipated declines in value. Morningstar DBRS' analysis includes liquidation scenarios for both loans, resulting in total implied losses approaching $31 million. The projected loss would nearly reduce the unrated Class HRR certificate entirely, eroding credit support to the junior bonds in the transaction. Morningstar DBRS believes that current performance trends for these loans indicate the potential for further value decline, and this concern is reflected in the Negative trends maintained on classes D, ERR, and FRR. Outside of the loans in special servicing, Morningstar DBRS also notes the high concentration of loans backed by office properties, with a number of those loans exhibiting performance declines from issuance coupled with significant upcoming rollover risk. These loans are considered primary drivers of the Negative trends on Classes X-B, B, and C.

As of the July 2024 remittance, 33 of the original 37 loans remain in the pool with an aggregate principal balance of $685.7 million, representing a collateral reduction of 15.4% since issuance. Seven loans, representing 28.9% of the pool, are on the servicer's watchlist being monitored for low debt service coverage ratios (DSCRs), occupancy declines, upcoming maturities, and deferred maintenance. Excluding collateral that has been fully defeased, the pool is most concentrated by loans that are secured by office properties, which represent 41.7% of the pool balance. 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. Where applicable, Morningstar DBRS increased the probability of default (POD) penalties and, in certain cases, applied stressed loan-to-value ratios (LTVs) for loans exhibiting performance concerns.

The largest loan in special servicing, First Stamford, is secured by a Class A office complex in Stamford, Connecticut. The pari passu loan is securitized across five CMBS transactions, including the subject transaction as well as JPMDB 2017-C7 and BANK 2017-BNK7, which are also rated by Morningstar DBRS. The loan transferred to special servicing in December 2023 for payment default. The most recent special servicer commentary notes that a receiver was appointed in May 2024 and the workout strategy is foreclosure. The occupancy rate has declined to 75% as of YE2023 from 91% at issuance as a result of departing or downsizing tenants. Consequently, the loan's cash flow and DSCR have also declined since issuance. There is concentrated near-term lease rollover as tenant leases representing approximately 17.0% of the net rentable area are scheduled to expire within the next 12 months. According to Reis, as of Q2 2024, the average office vacancy rate in the Stamford submarket was 28.8%. An appraisal dated February 2024 indicated an as-is value of $135.9 million, a substantial decline from the issuance appraised value of $285.0 million. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the most recent appraised value, resulting in a loss severity of approximately 40.0%.

The second largest loan in special servicing, 211 Main Street (Prospective ID#6; 6.6% of the pool), transferred to the special servicer in April 2024 following the sponsor's inability to repay the loan at maturity. The subject note is pari passu with notes securitized in JPMCC 2016-JP6 and DPJPM 2017-C6, both of which are rated by Morningstar DBRS. The collateral is a 417,266-square foot (sf) office building constructed in 1973 and located in the heart of downtown San Francisco. Although unconfirmed by the servicer, media sources indicate the borrower was granted a four-year loan extension, which would extend the loan's maturity date to April 2028. At issuance, the building was 100% occupied by Charles Schwab, which maintained its global headquarters at the subject on a lease through April 2028. In 2021, the tenant moved its headquarters to the Dallas-Fort Worth area and has reduced its footprint at the subject to six floors from 17 floors. Charles Schwab has no termination options and Morningstar DBRS expects that all excess cash is being trapped according to the loan triggers. The tenant continues to honor its original lease terms, as evidenced by the stable reported cash flow and DSCR. According to Reis, the South Financial District office submarket reported a Q2 2024 vacancy rate of 23.3% and net absorption of -1.84 million sf for YE2023, indicating an uphill battle to find suitable tenants during the loan's proposed extension period. If a loan extension was indeed granted, it will provide a longer runway with which the borrower may locate replacement tenants but also expose the loan to increased maturity default risk as the sole in-place lease is co-terminous with the extended maturity. Morningstar DBRS expects the property value has likely declined from the issuance value of $294 million given the decline in space utilization in addition to the challenged office landscape, weakened submarket conditions, and age of the asset. Morningstar DBRS analyzed this loan with an elevated POD and LTV.

The last specially serviced loan, Springhill Suites Newark Airport (Prospectus ID#13; 2.4% of the pool), is secured by a 200-key limited-service hotel in Newark, New Jersey. The loan transferred to special servicing in June 2020 and became real estate owned in January 2023. The special servicer continues to work to stabilize property performance while finalizing the timing for an eventual disposition. An updated STR report was not provided; however, according to the servicer commentary, the subject reported an occupancy rate, average daily rate, and revenue per available room (RevPAR) of 83%, $145.40, and $120.62, respectively for the trailing 12-months ended March 31, 2024. The property's RevPAR penetration for the same time period was 109%. Although these metrics have improved since the loan's transfer to special servicing, the most recent appraised value of $20.3 million, dated February 2024, represents a -29% variance from the issuance appraised. In its analysis, Morningstar DBRS liquidated this loan from the pool based on a 10% haircut to the February 2024 value with the loss severity approaching 45%.

At issuance, Morningstar DBRS assigned an investment-grade shadow rating to the Gateway Net Lease Portfolio loan (Prospectus ID#2; 8.8% of the pool). As part of the current review, Morningstar DBRS removed the shadow rating in light of the borrower's inability to repay the loan at maturity in June 2024. The loan is secured by a portfolio of 41 single-tenant industrial and office properties totaling approximately 5.3 million sf situated across 20 states. Although financial performance remains in line with issuance expectations, the borrower has entered into a forbearance agreement effective to August 2024 to allow it additional time to obtain takeout financing.

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

Classes X-A and X-B 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 credit ratings assigned to Classes B, C, and ERR 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 ratings 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 ratings. The rationale for the material deviation is uncertain loan level event risk. The results of Morningstar DBRS' analysis suggested downward pressure through the middle of the bond stack, most pronounced for Classes B and C; however, Morningstar DBRS has adequately stressed loans of concern and in the event of further deterioration the Negative trends assigned to those classes indicate that future credit rating downgrades are possible.

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
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 (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 (July 17, 2023).

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.