Morningstar DBRS Downgrades Credit Ratings on Seven Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2016-C29, Changes Trends on Seven Classes to Negative From Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on seven classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C29 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2016-C29 as follows:

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

Morningstar DBRS changed the trends on Classes B, C, D, E, X-B, X-D, and X-E to Negative from Stable. Classes A-3, A-4, A-SB, A-S, and X-A continue to carry Stable trends. There are no trends for Classes F, G, and X-F, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS).

The credit rating downgrades on Classes D, E, F, G, X-D, X-E, and X-F reflect Morningstar DBRS' increased loss projections for the loans in special servicing. Since the last credit rating action, Princeton Pike Corporate Center (Prospectus ID#16, 2.2% of the current pool balance) and 696 Centre (Prospectus ID#13, 2.1% of the current pool balance) transferred to special servicing, and there are currently three specially serviced loans, representing 5.6% of the pool balance. Morningstar DBRS' analysis included a liquidation scenario for all three specially serviced loans, resulting in implied losses of approximately $23.5 million, an increase from Morningstar DBRS' projected losses of $7.0 million at the time of the last credit rating action. The current implied losses are projected to fully erode the unrated Class H certificate and approximately 65.0% of the Class G certificate, further reducing credit enhancement to the junior bonds. The primary contributor to the increase in Morningstar DBRS' projected loss is the liquidation scenario for the recently transferred 696 Centre loan. The Negative trends on Classes D and E are tied to the potential for further value deterioration for the loans in special servicing.

The Negative trends on Classes B, C, and X-B reflect Morningstar DBRS' concerns regarding loans not yet in special servicing. With this review, Morningstar DBRS' weighted-average (WA) expected loss (EL) for the pool increased by approximately 100 basis points over the WA EL at the last review, primarily attributable to the two largest loans in the pool: Grove City Premium Outlets (Prospectus ID#1, 8.35% of the current pool balance) and 300 Four Walls (Prospectus ID#2, 7.4% of the pool balance). Both loans have been exhibiting year-over-year declines in occupancy rates, though net cash flow (NCF) and debt service coverage ratios (DSCR) remain relatively in line with issuance expectations. Given that both loans are approaching their respective maturity dates in December 2025 and February 2026, the increasing vacancy could prove challenging as the borrower seeks refinancing. To account for the increased risk, Morningstar DBRS' analysis included stressed loan-to-value ratios and/or elevated probabilities of default for these loans. Should these loans' performance deteriorate further or additional defaults occur, those classes with Negative trends may be subject to further credit rating downgrades.

The credit ratings for the remaining Classes A-3, A-4, A-SB, A-S, and X-A were confirmed at AAA (sf), reflective of the otherwise overall stable performance of the remaining loans in the pool and Morningstar DBRS' expectation that these classes are sufficiently insulated from losses and will be recovered from loans expected to pay at maturity, based on their most recent year-end WA DSCR above 2.10 times (x) and WA debt yield of approximately 13.5%.

As of the July 2024 remittance, 61 of the original 69 loans remained in the trust, with an aggregate balance of $677.6 million, representing a collateral reduction of 16.3% since issuance. There are 21 fully defeased loans, representing 24.4% of the current pool balance. One previously specially serviced loan, Wabash Landing Retail (Prospectus ID#22), was liquidated from the trust in December 2023, resulting in a realized loss of $2.8 million to the trust, slightly above Morningstar DBRS' loss projections of $2.2 million at its last review in August 2023, thereby eroding approximately 15% of the nonrated Class H. Interest shortfalls have also increased to $1.4 million with this review from $1.0 million in August 2023.

Excluding the defeased loans, the pool is most concentrated by retail and office properties, which represent 36.7% and 15.3% of the pool balance, respectively. Morningstar DBRS has a cautious outlook on the office sector given the anticipated upward pressure on vacancy rates in the broader office market, challenging landlords' efforts to backfill vacant space, and, in certain instances, contributing to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Outside of the loans in special servicing, Morningstar DBRS' analysis includes an additional stress for two office loans exhibiting weakened performance, which resulted in loan-level WA ELs that are more than double the pool's average EL.

The primary contributor to the implied liquidation losses is 696 Centre, which is secured by a 204,552-square-foot (sf) suburban office building in Farmington Hills, Michigan, approximately 20 miles outside of Detroit. The loan transferred to the special servicer in February 2024 for imminent monetary default after the borrower failed to pay its January 2024 scheduled debt payment. As per the July 2024 remittance, the loan remains 90+ days delinquent. As per the special servicer's commentary, the borrower requested an extension and discussions remain ongoing. The loan was previously on the servicer's watchlist because of the departure of its largest tenant, Google (which formerly occupied 41.4% of the net rentable area (NRA)), at its lease expiry in November 2022. Another tenant, Botsford General Hospital (which formerly occupied 24.9% of the NRA), also vacated in March 2022, prior to its December 2024 lease expiry. As a result, occupancy at the subject plummeted to 32.9% as of YE2023. As per the servicer site inspection performed in April 2024, occupancy at the subject has declined further to 26.9%, with an additional 7.0% of the NRA scheduled to roll over prior to loan maturity in January 2026. The departure of the property's largest tenants triggered cash management, and the loan reported a total balance of $1.8 million across all reserve accounts in July 2024. The borrower is reportedly funding operating shortfalls as the property is not generating enough revenue to cover expenses.

The property was reappraised in March 2024 at $6.1 million, which represents a 74.6% decline from the issuance appraised value of $24.0 million. As per Reis, similar-vintage office properties within the Farmington Hills submarket reported an average vacancy rate of 20.5%, with an average asking rent of $18.47 per sf (psf), which is in line with the subject's average rental rate of $18.57 psf as per the April 2024 rent roll. Despite ongoing discussions surrounding a plausible extension, given the softening submarket metrics, significant drop in occupancy, and value deterioration with the latest appraisal, it is likely this asset will ultimately incur a loss upon resolution. Morningstar DBRS analyzed this loan with a liquidation scenario based on a conservative haircut to the most recent value, suggesting a loss severity of approximately 80%.

Another loan in special servicing is Princeton Pike Corporate Center, which is secured by an eight-building suburban office complex in the Trenton suburb of Lawrenceville, New Jersey. The loan is pari passu with the MSBAM 2016-C28 transaction, which is also rated by Morningstar DBRS. The loan transferred to special servicing in February 2024 for imminent monetary default after the borrower indicated its inability to cover debt service and operating expenses. However, as of the July 2024 reporting, the loan was reported current. Occupancy at the collateral has fallen significantly, reported at only 59.5% as per the February 2024 rent roll, a further decline from the already-low YE2022 occupancy figure of 73.6%. Moreover, leases totaling approximately 23.0% of the NRA are scheduled to roll over in the next 12 months. According to Reis, office properties within the Trenton submarket reported an average vacancy rate of 17.4% and an average asking rental rate of $26.60 psf as of Q1 2024. However, Morningstar DBRS expects that the availability rate within the submarket could be much higher than the reported vacancy rate given the shift in demand for office space, particularly within suburban markets.

The annualized September 2023 NCF was $7.1 million (reflecting a DSCR of 1.16x), compared with the YE2022 figure of $9.2 million (a DSCR of 1.50x) and the Morningstar DBRS NCF of $10.8 million. The drop in cash flow was attributed to a drop in occupancy, although Morningstar DBRS notes that multiple tenants vacated their space throughout 2023, suggesting the full-year 2023 and 2024 cash flows could show even further declines. Given the current payment status, an updated appraisal has not been ordered. Morningstar DBRS' liquidation scenario was based on a haircut to the issuance appraised value to reflect the declines in occupancy and cash flow, resulting in a projected loss severity approaching 40%.

The Penn Square Mall (Prospectus ID#3, 6.9% of the pool) loan was shadow-rated investment grade at issuance. With this review, Morningstar DBRS notes that the loan continues to exhibit investment-grade loan characteristics as demonstrated by the stable cash flow and occupancy rate.

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-D, X-E, and 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 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 and C 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 stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk. All the loans in the transaction are scheduled to mature by May 2026. Although there are concerns about increased default risk on a number of loans, Morningstar DBRS expects the majority of maturing loans to repay from the trust, improving credit support to these bonds. Morningstar DBRS changed the trends on both classes to Negative from Stable with this credit rating action to signal the potential for downgrades should additional defaults occur or collateral performance decline further.

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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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.