Morningstar DBRS Downgrades Four Classes of Wells Fargo Commercial Mortgage Trust 2016-C36

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C36 issued by Wells Fargo Commercial Mortgage Trust 2016-C36 as follows:

-- Class C to A (low) (sf) from A (sf)
-- Class X-D to BBB (low) (sf) from BBB (sf)
-- Class D to BB (high) (sf) from BBB (low) (sf)
-- Class E-1 to BB (low) (sf) from BB (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-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class E at B (sf)
-- Class E-2 at B (sf)
-- Class F-1 at B (low) (sf)
-- Class F-2 at CCC (sf)
-- Class F at CCC (sf)
-- Class EF at CCC (sf)
-- Class G-1 at CCC (sf)
-- Class G-2 at C (sf)
-- Class G at C (sf)
-- Class EFG at C (sf)

Additionally, Morningstar DBRS changed the trends on Classes C, D, E1, E2, E, XD, and F1 to Stable from Negative.

Classes F-2, F, EF, G-1, G-2, G, and EFG have ratings that do not typically carry trends for commercial mortgage-backed securities (CMBS) ratings. All other trends are Stable.

The credit rating downgrades reflect continued performance challenges for a few larger loans in the pool that are facing elevated refinance risk, namely Gurnee Mills (Prospectus ID#1, 10.6% of the pool), 101 Hudson (Prospectus ID#2; 9.5% of the pool), and Plaza America I & II (Prospectus ID#3, 9.2% of the pool). While all three loans are current, property-level net cash flows (NCF) and/or occupancy rates have experienced meaningful declines since issuance, resulting in updated value projections that indicate significant value deficiencies as the loans approach their respective maturities. Where applicable, Morningstar DBRS increased the probability of default penalties (POD) and/or increased loan-to-value ratios (LTVs) for these three loans and others exhibiting increased risk of maturity default. Morningstar DBRS also maintained the liquidation of two real estate-owned loans from the trust, Mall at Turtle Creek (Prospectus ID#7, 1.7% of the pool) and One & Two Corporate Plaza (Prospectus ID#28, 0.9% of the pool), resulting in an implied loss of more than $16.0 million, significantly eroding the transaction's credit support, particularly toward the bottom of the capital stack. When compounded with Morningstar DBRS' increased weighted-average (WA) expected loss, the CMBS Insight Model results indicate significant downward pressure, supporting the credit rating actions.

The credit rating confirmations reflect the overall stable performance of the underlying collateral, as exhibited by a healthy WA debt service coverage ratio (DSCR) of 2.04 times (x) based on the most recent financial reporting available. As of the August 2024 reporting, 66 of the original 73 loans in the pool, with a trust balance of $708.7 million, represented a collateral reduction of 17.4% since issuance as a result of scheduled loan amortization and loan repayment. There are 15 loans, representing 13.2% of the pool, secured by collateral that has been defeased. Two loans are in special servicing, representing 2.6% of the pool, and 11 loans are on the servicer's watchlist, representing 33.8% of the pool, primarily for declines in occupancy, low DSCRs, or deferred maintenance.

Gurnee Mills is secured by a 1.68 million-square-foot (sf) portion of a larger 1.9 million-sf regional mall in the north-western Chicago suburb of Gurnee, Illinois, which is owned and managed by Simon Property Group (Simon). The largest collateral tenants are Bass Pro Shops, Kohl's, and Macy's, while noncollateral tenants include Marcus Cinema, Burlington Coat Factory, and Value City Furniture. The property was 82.2% occupied as of December 2023, relatively in line with the prior year but lower than the issuance figure of 91.1%. Challenges at the property began after the departure of Sears Grand (Sears; formerly 12.0% of the net rentable area (NRA)) in 2018, with other notable tenants including Rink Side (formerly 3.3% of NRA) and Bed Bath & Beyond (formerly 3.6% of NRA) vacating in subsequent years; however, there has been some positive leasing momentum in recent years. Most notably, the former Sears space has been partially backfilled by Hobby Lobby (4.0% of the NRA) and Round1 Bowling & Arcade (4.4% of NRA), while media sources indicate Primark (2.6% of NRA) and Boot Barn (1.2% of NRA) are expected to move into the space previously occupied by Bed Bath & Beyond.

According to the year-end (YE) 2023 financial reporting, the property generated $17.9 million of NCF, reflecting a DSCR of 1.7x; lower than the prior year's figure and the Morningstar DBRS figure at issuance of $19.7 million and $21.7 million, respectively. However, there is potential for NCF to increase in the near term as new tenants take possession of their space and rent abatements burn off. Given occupancy and NCF at the property remain below issuance expectations, Morningstar DBRS notes that the collateral's as-is value has likely declined, elevating the credit risk to the trust. As such, Morningstar DBRS increased the POD for this loan and applied a stressed LTV ratio in its analysis for this review, resulting in an expected loss approximately 2.5x greater than the pool average.

101 Hudson is secured by a 1.3 million-sf, Class A office property on the waterfront in Jersey City, New Jersey. The loan has been monitored on the servicer's watchlist because of declines in occupancy following the departure of the property's former second-largest tenant, National Union Fire Insurance (formerly 20.2% of NRA), which vacated in 2018. Since then, occupancy hovered in the mid-70.0% range but fell to 64.8% as of March 2024 following the downsizing of TP ICAP America's Holdings, which gave back 37,000 sf of space. Outside of the largest tenant, which occupies 28.6% of the NRA on a lease that expires in March 2027, tenancy at the subject is granular, with no tenant comprising more than 5.0% of NRA and limited rollover through the loan's October 2026 maturity.

Despite the sustained low occupancy rate, the loan's DSCR was reported at 2.11x as of Q1 2024, below 3.17x at YE2023, and the Morningstar DBRS DSCR of 2.88x derived at issuance. The asset was acquired by The Birch Group in October 2022 at a purchase price of $346.0 million, below the issuance appraised value of $482.5 million, representing an LTV of 72.3%. Morningstar DBRS believes the property's as-is value has likely declined further because of the continued capitalization rate expansion and recent deterioration of office market fundamentals. As a result, Morningstar DBRS analyzed this loan with an elevated LTV and applied an additional POD adjustment to reflect the property's high vacancy rate, resulting in an expected loss approaching 2.0x greater than the pool average.

Plaza America I & II is secured by a 514,615-sf, Class A, office complex in Northern Virginia, about 20 miles northwest of Washington, D.C. Occupancy at the subject property has declined from 88.0% at issuance to 63.0% as of March 2024, following the loss of a several tenants, including Software AG (formerly 12.1% of NRA), which recently vacated its space in February 2024. Per the most recent financials for the trailing 12 months ended March 31, 2024, the loan's DSCR has fallen to 1.68x, below the Morningstar DBRS figure of 1.92x; however, given the recent departure of Software AG, coupled with the borrower's lack of leasing momentum, as well as soft market conditions and a significant amount of near-term tenant rollover with leases representing 27.9% of the NRA that have already expired or will expire in the next 12 months, Morningstar DBRS anticipates further performance declines.

The sponsor is currently advertising 416,507 sf (82.6% of the NRA) as available for leasing for an average rental rate between $35 per sf (psf) and $44 psf, which is higher than the current average in-place rental rate of $25.74 psf, according to the March 2024 rent roll. As of Q2 2024, Reis reported that office properties in the Reston submarket had an average vacancy rate of 21.1%, an average effective rental rate of $30.7 psf, and an average asking rental rate of $37.2 psf, respectively. Morningstar DBRS believes the property's as-is value has and will likely continue to decline; as such, Morningstar DBRS increased the POD for this loan and applied a stressed LTV ratio in its analysis for this review, resulting in an expected loss approximately 2.0x greater than the pool average.

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-B, and X-D 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. 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.

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 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
-- 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
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293

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