Morningstar DBRS Changes Trends on Seven Classes of Benchmark 2022-B34 Mortgage Trust to Negative from Stable, Confirms Credit Ratings on All Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2022-B34, issued by Benchmark 2022-B34 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 at AAA (sf)
Class A-5 at AAA (sf)
Class A-M at AAA (sf)
Class X-A at AAA (sf)
Class B at AA (sf)
Class C at A (low) (sf)
Class D at BBB (high) (sf)
Class X-D at BBB (sf)
Class E at BBB (low) (sf)
Class X-F at BB (sf)
Class F at BB (low) (sf)
Class X-G at B (high) (sf)
Class G at B (sf)

Morningstar DBRS changed the trends on Classes D, E, F, G, X-D, X-F, and X-G to Negative from Stable. The trends on all remaining classes are Stable.

The transaction is highly concentrated with loans secured by office collateral, representing more than 50.0% of the pool balance. While a select number of those loans continue to perform as expected, several others, including the second and fourth largest loans in the pool, One Wilshire (Prospectus ID#2, 9.4% of the pool) and Romaine & Orange (Prospectus ID#4, 7.5% of the pool), are exhibiting increased credit risk with exposure to upcoming lease roll-overs, softening office submarket fundamentals, and/or have experienced sustained performance declines since issuance. The Negative trends assigned to the four lowest-rated classes reflect these loan-specific challenges considering those classes are most exposed to loss if the performance of the underlying collateral continues to deteriorate. Mitigating factors include a sizable unrated first-loss piece totaling $29.3 million with no losses incurred to the trust to date. In addition, the largest loan in the pool, which is secured by an office property, is shadow-rated investment grade, as further described below.

The credit rating confirmations reflect the overall stable performance of the transaction, as evidenced by the pool's strong weighted-average (WA) debt service coverage ratio (DSCR) of 2.58 times (x) and the WA debt yield of approximately 10.0%, based on the most recent financial reporting available. There is only one loan in special servicing, which represents 1.0% of the pool balance. That loan was analyzed with a liquidation scenario, resulting in a relatively minor projected loss of $6.0 million.

As of the August 2024 remittance, all of the original 37 loans remain in the pool with a trust balance of $909.1 million, representing a collateral reduction of 0.6% since issuance. Six loans, representing 19.8% of the pool balance, are on the servicer's watchlist, and no loans have defeased. The sole loan in special servicing, Arlington Green Executive Plaza (Prospectus ID#29, 1.0% of the pool) is secured by a 63,000-square-foot (sf) office building located in the suburban Chicago neighborhood of Arlington Heights. The loan transferred to special servicing in June 2023 for payment default and a receiver has been appointed to oversee the asset through the foreclosure process. As of August 2024, outstanding advances totaled approximately $1.1 million. According to Reis, office properties in the Northwest Suburbs submarket reported a vacancy rate of 31.7% with an average effective rental rate of $34.4 per sf (psf) as of Q2 2024. No updated appraisal has been provided since issuance when the property was valued at $14.6 million; however, given the property's low occupancy rate, which was most recently reported at 77.0% as of February 2023, combined with soft submarket fundamentals and general challenges for office properties in today's environment, Morningstar DBRS expects that the collateral's as-is value has likely declined significantly, elevating the credit risk to the trust. Morningstar DBRS' liquidation scenario considered a conservative haircut to the property's appraised value at issuance resulting in a loss severity in excess of 70.0%.

The largest loan in the pool, One Wilshire (Prospectus ID#1, 9.4% of the pool), is secured by a 30-storey office tower in downtown Los Angeles totaling approximately 662,000 sf. The property is unique in that it operates primarily as a telecommunications hub connected to three transpacific fiber-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 $85.0 million component of a $389.3 million whole loan across six transactions, of which one (Benchmark 2022-B35 Mortgage Trust) is rated by Morningstar DBRS. As of the March 2024 rent roll, the property was 70.3% occupied, a decline from 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). Near-term rollover risk is moderate with leases representing approximately of 13.0% of the NRA set to expire prior to 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 higher than 3.0x, 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. However with this review, Morningstar DBRS has elected to remove the shadow rating, given 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.

The largest loan on the servicer's watchlist, Romaine & Orange Square, is secured by two adjacent office buildings totaling 122,411 sf in the Creative District of Los Angeles. The Romaine building is a 91,286 sf, Class A office building, built in 2018 by the sponsor. The property has since been converted into medical office space. The Orange building is an older- vintage, Class B office building, built in 1928, and over the years it was fully converted into a creative and media/post production space. The loan was added to the servicer's watchlist in March 2023 for a low DSCR, and, as of the August 2024 remittance, is cash managed. According to the March 2024 rent roll, tenants paid an average rental rate of $42.3 psf with a consolidated occupancy rate of 85.9%, an increase from the YE2023 occupancy rate of 80.7% but below the issuance figure of 95.0%. Within a one-mile radius of the subject, office properties reported a Q2 2024 average effective rental and vacancy rates of $45.0 psf and 16.0%, respectively. For the same period, the larger Mid-Wilshire/Miracle Mile/Park Mile submarket reported average figures of $30.7 psf and 23.0%, respectively, according to Reis. The financial reporting for the trailing-twelve month period ended March 31, 2024, reflects a net cash flow (NCF) figure of $3.9 million (DSCR of 1.28x) compared with the YE2023 figure of $3.7 million (DSCR of 1.21x) and the issuance figure of $5.4 million (DSCR of 1.78x). As a result of the soft submarket fundamentals and recent volatility in cash flow, Morningstar DBRS applied a stressed LTV ratio and probability of default penalty in its analysis, resulting in an EL that exceeded the pool average by approximately 50.0%.

At issuance, Morningstar DBRS shadow-rated two loans¿601 Lexington Avenue (Prospectus ID#5, 5.6% of the pool) and One Wilshire as investment grade. As outlined above, Morningstar DBRS elected to remove the shadow rating for the One Wilshire loan. Morningstar DBRS confirms that the characteristics of the 601 Lexington Avenue loan remain consistent with an investment-grade shadow rating, given the strong credit metrics, experienced sponsorship, and the underlying collateral's historically stable performance.

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-D, X-F, and X-G 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 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 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, 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.