Morningstar DBRS Downgrades Credit Ratings on Three Classes of Citigroup Commercial Mortgage Trust 2019-GC41, Changes Trends on Three Additional Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on three classes of Commercial Mortgage Pass-Through Certificates Series 2019-GC41 issued by Citigroup Commercial Mortgage Trust 2019-GC41 as follows: 
 
-- Class F to BB (low) (sf) from BB (high) (sf) 
-- Class G-RR to B (low) (sf) from B (high) (sf) 
-- Class X-F to BB (sf) from BBB (low) (sf) 
 
In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes as follows: 
 
-- Class A-2 at AAA (sf) 
-- Class A-3 at AAA (sf) 
-- Class A-4 at AAA (sf) 
-- Class A-5 at AAA (sf) 
-- Class A-AB at AAA (sf) 
-- Class AS at AAA (sf) 
-- Class X-A at AAA (sf) 
-- Class B at AA (high) (sf) 
-- Class X-B at AA (low) (sf) 
-- Class C at A (high) (sf) 
-- Class D at BBB (high) (sf) 
-- Class X-D at BBB (high) (sf) 
-- Class E at BBB (sf) 

Morningstar DBRS changed the trends on Classes D, E, and X-D to Negative from Stable and maintained Negative trends on Classes X-F, F, and G-RR. All other trends are Stable.

At the last credit rating action, Morningstar DBRS assigned Negative trends to Classes X-F, F, and G-RR, mainly due to the high concentration of loans backed by office properties in the pool, with Comcast Building Tucson (Prospectus ID#22, 1.6% of the pool balance) noted as one of the primary drivers given the suburban office property was dark. Since then, performance for the Comcast Building Tucson continues to be depressed and The Zappettini Portfolio (Prospectus ID#8, 4.6% of the pool balance) transferred to special servicing for maturity default. In addition, occupancy dropped significantly for 505 Fulton Street (Prospectus ID#14, 3.8% of the pool), a loan backed by a retail property. Details of these loans are highlighted below. For this review, Morningstar DBRS liquidated The Zappettini Portfolio from the pool and analyzed the Comcast Building Tucson and 505 Fulton Street with stressed probability of default (POD) penalties and/or loan to value ratios (LTVs) in the analysis, resulting in increased loss expectations for the pool, thereby supporting the credit rating downgrades. The Negative trends reflect the potential for further performance and value decline related to the loans of concern in addition to the high concentration of loans backed by office properties, which represent about 30.0% of the pool balance.

The credit rating confirmations on the remaining classes are reflective of the otherwise steady performance of the remaining loans in the pool as exhibited by a healthy weighted-average debt service coverage ratio (DSCR) of 2.58 times (x) based on the most recent year-end financials. As of the August 2024 remittance, 40 of the original 43 loans remain in the pool, representing a collateral reduction of 6.5% since issuance. Two loans are fully defeased, representing 1.1% of the pool balance. There are six loans on the servicer's watchlist, representing 9.3% of the pool balance, being monitored primarily for cash flow trigger events, decline in performance and/or deferred maintenance items.

The Zappettini Portfolio is secured by a portfolio of 10 office/flex buildings in Mountain View, California. The property is within Silicon Valley and is close to Google and Microsoft campuses. The loan recently transferred to special servicing in June 2024 for maturity default with the servicer commentary noting a portfolio occupancy rate of 58%, which is a significant decline from its historical occupancy rate of 100%. The majority of the buildings are leased to one or two tenants with significant rollover risk of more than 40.0% of the net rentable area (NRA) in 2024. Based on the trailing 12-months ended (T-12) September 30, 2023, financials, the loan reported a DSCR of 1.70x. An updated appraisal is not available at this time, but the significant occupancy decline and the generally challenged office submarket suggests value has declined from the issuance appraised figure of $187.4 million. A workout has yet to be established, although the special servicer is dual tracking foreclosure as discussions continue. For this review, Morningstar DBRS took a conservative approach and liquidated the loan from the pool based on a haircut to the issuance value, resulting in a loss severity in excess of 30.0%.

The Comcast Building Tucson loan is secured a 211,152-square-foot (sf) suburban property in Tucson, Arizona. The single tenant, Comcast, took occupancy in 2015 after a major retrofit of the building, bringing more than 1,100 employees to what was considered a state-of-the-art call center. The property consisted of a three-story building with a movie theater, a fitness facility, and food service facilities as well as a four-level parking garage. The loan is on the servicer's watchlist because a cash flow sweep was triggered as Comcast did not provide notice to renew its lease 36 months prior to the January 2026 lease expiration and appears to have vacated the subject based on an August 2022 news article, although the tenant continues to honor its lease payments. According to the servicer, there is $284,499 held in the cash management account, as well as $1.7 million in a lease sweep account and $1.2 million in a general rollover reserve.

The borrower has been actively marketing the entire property for lease since 2022. According to Reis, office properties located in the Northwest submarket reported a Q2 2024 vacancy rate of 14.2% and asking rental rate of $24.27 per square foot (psf), compared with the Q2 2023 vacancy rate of 15.4% and asking rental rate of $24.12 psf. Based on the year-end (YE) 2023 financials, the loan is reporting a DSCR of 2.32x. Morningstar DBRS maintains its negative outlook for this loan given the collateral's build-out to specifically suit a call-center and the change in workplace dynamics combined with the upcoming lease expiration and generally soft submarket conditions. If the borrower is unable to secure a replacement tenant, there is a high likelihood of the loan transferring to special servicing and the value of the subject would be considerably impaired. For this review, Morningstar DBRS analyzed this loan with an elevated POD penalty and stressed LTV, resulting in an expected loss that is more than four times the pool average.

505 Fulton Street is secured by a 114,209-sf anchored retail property in Brooklyn. The loan has been on the servicer's watchlist since July 2023 because major tenants Nordstrom Rack (35.5% of the net rentable area (NRA)) and TJ Maxx (25.9% of NRA) have scheduled lease expirations in April 2024 and, ultimately, these tenants vacated the subject. The property historically reported a 100% occupancy rate, but with the departure of two large tenants, occupancy has likely fallen to near 35.0%. In addition, Old Navy (19.7% of NRA), has a lease scheduled to expire in January 2025, which would further reduce occupancy to approximately 20.0% if the tenant decides to vacate. Based on the YE2023 financials, the loan reported a DSCR of 2.61x, but this will likely drop to below 2.0x when accounting for the departure of Nordstrom and TJ Maxx. In the event Old Navy also vacates, DSCR will drop further to about 1.0x. Considering the increased vacancy and near-term tenant rollover risk, Morningstar DBRS analyzed this loan with an elevated POD penalty, resulting in an expected loss more than three times the pool average.

Three loans, representing a combined 18.0% of the pool, are shadow-rated investment grade by Morningstar DBRS¿30 Hudson Yards (Prospectus ID#1), Grand Canal Shoppes (Prospectus ID#6), and Moffett Towers II Buildings 3 & 4 (Prospectus ID#7). With this review, Morningstar DBRS confirms that the loans continue to perform in line with the investment-grade loan characteristics. The Centre loan (Prospectus ID#27, 1.3% of the pool balance), a Class A multifamily property located in Cliffside Park, New Jersey, was shadow-rated at issuance. This loan did not repay at its initial maturity in July 2024, however, the borrower is working towards a short-term extension. Performance overall is healthy with a YE2023 DSCR at 2.52x and an occupancy rate of 97.0%. For this review, Morningstar DBRS took a conservative approach by removing the shadow-rating and applied a stressed POD in the analysis.

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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

Classes X-A, X-B, X-D, 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 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.

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.

-- 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, 2024); https://dbrs.morningstar.com/research/438283

-- 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.