Morningstar DBRS Confirms Credit Ratings on All Classes of Benchmark 2022-B35 Mortgage Trust, Changes Trends on Eight Classes to Negative from Stable

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2022-B35 issued by Benchmark 2022-B35 Mortgage Trust as follows:
 
-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3-1 at AAA (sf)
-- Class A-3-2 at AAA (sf)
-- Class A-4-2 at AAA (sf)
-- Class A-4-1 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class X-F at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class X-G at BB (sf)
-- Class G at BB (low) (sf)
-- Class X-H at BB (low) (sf)
-- Class H at B (high) (sf)
 
Morningstar DBRS changed the trends on Classes E, F, G, H, X-D, X-F, X-G, and X-H to Negative from Stable. The trends on all remaining classes are Stable.

The credit rating confirmations and Stable trends reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS' expectations at issuance. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the strong weighted-average (WA) debt service coverage ratio (DSCR) of 2.02 times (x) and the WA debt yield of 10.1% based on the most recent financial reporting available. The pool, however, has a significant concentration of loans secured by office properties, representing the largest property type concentration at 48.9% of the pool balance. In general, loans secured by office properties are performing as expected; however, Morningstar DBRS has a cautious outlook on the office 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. As a result, Morningstar DBRS identified four loans backed by office properties were adjusted with stressed loan-to-value (LTV) ratios. These loans have all exhibited declines in occupancy and/or performance and if concerns persist, may result in declines in their respective values, supporting the Negative trends. Morningstar DBRS will continue to monitor these loans for potential concerns if performance continues to decline.

As of the August 2024 remittance, all 38 of the original loans remain in the pool with a marginal collateral reduction of only 0.3% of the pool since issuance. There are no defeased loans and no loans in special servicing. There are nine loans on the servicer's watchlist, representing 17.1% of the pool; however, only three of these loans are on the servicer's watchlist for performance-related concerns.

The largest loan in the pool and largest office loan in the pool, One Wilshire (Prospectus ID#1, 9.9% of the pool), is secured by a 30-storey office tower in downtown Los Angeles totaling approximately 662,000 square feet. The property is unique in that it operates primarily as a telecommunications hub connected to three transpacific fibre optic connections, featuring approximately 75.0% of net rentable area (NRA) that is used as data center and telecommunications space, with the remaining components dedicated to traditional office space and a small retail component. The loan represents a $111.0 million component of a $389.3 million whole loan across six transactions, of which one (Benchmark 2022-B34 Mortgage Trust) is rated by Morningstar DBRS. As of the March 2024 rent roll, the property was 70.3% occupied, which has declined to less than the issuance occupancy rate of 87.3%. The decline in occupancy is directly attributable to the property's former second-largest tenant Musick, Peeler & Garrett LLP (previously 16.1% of NRA) vacating the subject at its lease expiration in October 2023. As of the March 2024 rent roll, the top three tenants at the property are Coresite One Wilshire (26.7% of the NRA, lease expiry in July 2029), ZColo LLC (4.43% of the NRA, lease expiry in October 2033), and Crown Castle GT Co LLC (4.17% of the NRA, lease expiry in December 2025) with an additional rollover risk of 13.4% of the building NRA through December 2025.

Although the dip in occupancy is significant, the approximate implied DSCR factoring in the vacancy of the former second largest tenant remains healthy at 3.12x as compared with the YE2023 DSCR of 3.31x. According to a Q2 2024 Reis report, the Downtown submarket of Los Angeles reported a vacancy rate of 17.9%, which is expected to persist over the next five years. In addition, absorption rates have been negative since 2022 and Reis forecasts the trend to persist through 2026. At issuance, the loan was shadow rated investment grade because of its unique characteristics for data center tenants, low Morningstar DBRS LTV of 42.6%, and significant sponsor cost basis of $510.1 million at issuance. However with this review, Morningstar DBRS has elected to remove the shadow rating with this review because of the declining occupancy, specifically with respect to the office portion of the space, which given current office market conditions, may increase the potential for the subject's value to decline. In its analysis, Morningstar DBRS analyzed the loan with a stressed LTV ratio, which resulted in an expected loss (EL) that was approximately five times greater than the EL at issuance.

Another concerning office loan is Industry RiNo Station (Prospectus ID#7, 5.4% of the pool), which is secured by a 177,687 sf office complex in the Midtown submarket of Denver. Property occupancy has dropped from 95% at issuance to 78.1% as of the February 2024 rent roll, largely attributed to the vacating of the former third-largest tenant, Velocity Global LLC (11.5% of the NRA), in 2023 at the conclusion of its lease. The decline in occupancy has caused downward pressure on net cash flow, which was reported at $4.0 million, with a 1.27x DSCR compared with the Morningstar DBRS derived figures of $4.5 million and 1.42x at issuance, respectively. The primary concern with the subject lies in upcoming rollover, which totals 48.2% of the NRA through December 2025 and includes the largest and third-largest tenants at the property, OneTrust LLC (17.5% of the NRA, lease expiry in July 2025) and Intrinsic LLC (4.0% of the NRA, lease expiry in February 2025), respectively. While it is uncertain whether these tenants will exercise renewals, the concerns are exacerbated by the soft submarket that according to Reis, reported a 12.8% vacancy rate in Q2 2024 that is expected to increase to 19.3% by 2029. For these reasons, Morningstar DBRS applied a stressed LTV ratio and probability of default penalty to the loan, resulting in an EL that is more than double the pool average.

At issuance, Morningstar DBRS shadow-rated an additional two loans¿ILPT Logistics Portfolio (Prospectus ID#3, 6.6% of the pool) and 601 Lexington Avenue (Prospectus ID#19, 1.5% of the pool)¿as investment grade. For this review, Morningstar DBRS confirms that loan performance trends remain in line with investment-grade characteristics as supported by strong sponsorship strength and the historically stable performance of those two loans.

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 (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Classes X-A, X-D, X-F, X-G, and X-H 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 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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