Morningstar DBRS Confirms Credit Ratings on All Classes of Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3, Changes Trends on Four Classes to Negative From Stable

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-BNK3 issued by Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at B (high) (sf)

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

The credit rating confirmations reflect the stable performance of the transaction, which remains in line with Morningstar DBRS' expectations. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average (WA) debt service coverage ratio (DSCR) of 2.2 times (x), based on the most recent financial reporting available. In addition, the transaction continues to benefit from increased credit support to the bonds as a result of scheduled amortization, loan repayments, and defeasance. Although the majority of loans in the pool continue to exhibit healthy credit metrics, there is a moderate concentration of loans collateralized by office properties, which represent 22.0% of the current pool balance. The Negative trends assigned to the Class D, E, and F certificates reflect loan-specific concerns primarily related to the 85 Tenth Avenue (Prospectus ID#4; 5.7% of the pool) and 191 Peachtree (Prospectus ID#7; 4.6% of the pool) loans, which are secured by office properties that are exhibiting increased credit risks, as outlined below.

As of the August 2024 remittance, 61 of the original 63 loans remain in the pool with an aggregate principal balance of $871.5 million, representing a collateral reduction of 10.8% since issuance. Five loans, representing 4.3% of the pool, have been fully defeased. No loans are delinquent or in special servicing. There are 13 loans, representing 17.7% of the pool, on the servicer's watchlist; however, only six of those loans, representing 4.7% of the pool, are being monitored for performance related reasons. The largest loan on the watchlist, Komo Plaza (Prospectus ID#2; 8.0% of the pool), is being monitored because the property's largest tenant, Sinclair Broadcasting (42.3% of the net rentable area (NRA)) had a lease expiration in December 2023; however, the servicer has confirmed that the tenant has provided notice of renewal.

The 85 Tenth Avenue loan is secured by a 632,584 square foot (sf) Class A office property on the west side of Manhattan. Morningstar DBRS' concerns are primarily tied to the largest tenant, Google (47.2% of the NRA), whose lease is set to expire in February 2026, less than a year before loan maturity. According to the March 2024 rent roll, the property was 83.5% occupied, considerably lower than the issuance figure of 99.6%. There has been positive leasing momentum at the property with over 150,000 sf of leases signed between 2022 and 2023. According to the year-end (YE) 2023 financial reporting, the property generated $21.2 million of net cash flow (NCF) (a DSCR of 2.15x), 41.4% lower than the issuance figure of $36.2 million. There are rent abatements in place for some tenants, and as such, cash flow growth is expected within the near term. Google has expanded its footprint at the property since issuance in conjunction with establishing a Chelsea campus within a cluster of buildings in the subject's vicinity. Google has two five-year renewal options and the loan is structured with a cash flow sweep (capped at $50.0 psf) should Google not renew within 18 months of its lease expiration date. According to the servicer, terms of a lease extension commencing March 2026 through February 2034 are being reviewed by the lender; however, additional details have not been provided to date. Per the August 2024 reporting, reserve accounts had a total balance of $17.3 million. As of September 2024, Vornado was advertising just over 24,000 sf of available office space, representing approximately 4.0% of the NRA. Although the potential for a large vacancy around the maturity date and the in-place occupancy and cash flow declines from issuance are indicative of increased risks, there are mitigating factors in a low going-in loan-to-value (LTV) ratio of 47.4% (based on the whole-loan balance and the issuance appraised value of $835.0 million), providing some cushion against value declines. Morningstar DBRS analyzed the loan with an elevated probability of default (POD) penalty and stressed LTV, resulting in an expected loss that was approximately 2.5x greater than the pool average.

The 191 Peachtree loan is secured by a 1.2 million sf office property in Atlanta's central business district. The largest tenant, Deloitte & Touche USA LLP (Deloitte; 19.3% of NRA), had a lease expiration date in May 2024. Deloitte vacated all but 35,932 sf, signing a short-term 18-month lease for the remaining space. The property's occupancy rate has declined to 67.0% as of the June 2024 rent roll. The loan is structured with a cash flow sweep that was designed to trigger two years prior to Deloitte's lease expiration and, according to the August 2024 reporting, reserve balances total $12.2 million. Although the loan benefits from a moderate going-in LTV ratio of 64.9% (based on the whole-loan balance of $175.5 million and the issuance appraised value of $270.5 million), the Atlanta office market has been particularly challenged amid the sector shifts post-pandemic and Morningstar DBRS believes it is likely the as-is value is significantly below the issuance appraisal. According to Reis, office properties in the Downtown submarket reported a Q2 2024 vacancy rate of 18.4%, compared with the Q2 2023 vacancy rate of 13.8%. Morningstar DBRS analyzed the loan with an elevated POD penalty and stressed LTV, resulting in an expected loss that was more than triple the pool average.

Although the Calabasas Tech Center (Prospectus ID#9; 3.8% of the pool) and Rio West Business Park (Prospectus ID#13; 2.4% of the pool) loans continue to exhibit healthy credit metrics, both are notably backed by office properties located in suburban submarkets and both have exposure to large tenant rollover, prior to loan maturity in the fourth quarter of 2026. The stressed scenarios considered for each resulted in significantly increased loss expectations for both loans, further supporting the Negative trends assigned with this review.

With this review, Morningstar DBRS confirmed that the performance of one loan -- Potomac Mills (Prospectus ID#14; 2.4% of the pool) -- remains consistent with investment-grade characteristics. This assessment continues to be supported by the loan's 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 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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 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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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.