Morningstar DBRS Downgrades Credit Ratings on Four Classes of Wells Fargo Commercial Mortgage Trust 2016-NXS5

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2016-NXS5 issued by Wells Fargo Commercial Mortgage Trust 2016-NXS5 as follows:

-- Class X-B to A (high) (sf) from AA (low) (sf)
-- Class B to A (sf) from A (high) (sf)
-- Class C to BB (high) (sf) from BBB (high) (sf)
-- Class D to B (low) (sf) from BB (low) (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-6 at AAA (sf)
-- Class A-6FL at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)
-- Class G at C (sf)

Morningstar DBRS also changed the trends on Classes X-B, B, C, and D to Stable from Negative. All other trends are Stable, with the exception of Classes E, F, and G, which have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

Morningstar DBRS downgraded Classes D, E, and F as part of its prior credit rating action in March 2024, primarily as a result of the projected loss expectations tied to the largest loan in the pool, 10 South LaSalle Street (Prospectus ID# 2; 12.0% of the pool). At that time, Morningstar DBRS also assigned Negative trends to Classes X-B, B, and C and maintained the Negative trend on Class D, citing the potential of further value deterioration for a select number of underperforming office properties, most notably 10 South LaSalle Street.

In the analysis for this review, Morningstar DBRS considered liquidation scenarios for four of the five loans in special servicing, resulting in a cumulative projected loss amount of $72.3 million, approximately $50.0 million of which is tied to the 10 South LaSalle Street loan (based on a haircut to the collateral's appraised value at issuance). The liquidation scenario assumed for that loan in March 2024 reflected an implied loss amount of $32.0 million; however, considering operating performance at the property remains depressed, with occupancy expected to decline further in the near term, Morningstar DBRS elected to increase the haircut to the collateral's appraised value at issuance in its analysis for this review. The resulting increase in projected losses to the trust would erode the entirety of the Class H (nonrated), Class G, and Class F balance, in addition to a small portion of the Class E balance, significantly reducing credit support to the lowest-rated principal bonds in the transaction, particularly the Class B, Class C, and Class D certificates, supporting the most recent credit rating downgrades.

Morningstar DBRS changed the trends on Classes X-B, B, C, and D to Stable from Negative, as the analysis considered conservative scenarios for the loans in special servicing and those exhibiting increased risks from issuance. As such, the resulting credit rating downgrades reflect the longer-term outlook for those affected classes. Should there be unforeseen circumstances that further increase the risks for the underlying loans in question, Morningstar DBRS notes that it could change trends and/or further downgrade the credit ratings.

As of the January 2025 remittance, 55 of the original 64 loans remain in the pool, with a trust balance of $624.5 million, representing collateral reduction of 28.6% since issuance. To date, the trust has incurred a total loss of $2.6 million, which has been contained to the nonrated Class H certificate. Eight loans, representing 14.3% of the pool balance, are on the servicer's watchlist; however, only four of those loans, representing 7.6% of the pool balance, are being monitored for performance-related reasons. Five loans, representing 17.4% of the pool balance, are in special servicing. In addition, 17 loans, representing 19.2% of the pool balance, are fully defeased.

The 10 South Lasalle Street loan is collateralized by a 781,426-square foot (sf) Class B office property in the Central Loop submarket of Chicago. The 10-year fixed-rate loan has a maturity date in January 2026 and is pari passu with the loan piece held in the Wells Fargo Commercial Mortgage Trust 2016-C32 transaction, which Morningstar DBRS also rates. The loan transferred to the special servicer in August 2022 for imminent default, though it has remained current since the transfer with active cash management provisions in place. According to the financial reporting for the trailing six-month period ended June 30, 2024, the property was 67.6% occupied, relatively unchanged from the YE2023 occupancy rate of 71.7% but considerably below the issuance figure of 89.0%. Net cash flow has followed a similar downward trajectory: the most recent full year reporting from YE2023 reflected a figure of $3.3 million (a debt service coverage ratio (DSCR) of 0.69 times (x)), a 69.7% decline from the issuance figure of $10.7 million (a DSCR of 2.27x).

The largest tenant, Chicago Title Insurance Co (Chicago Title), occupies 13.6% of the net rentable area (NRA) on a lease expiring in March 2025. According to various online sources, Chicago Title is currently in advanced negotiations to sublease approximately 65,000 sf of space from Publicis Groupe at 35 West Wacker Drive, suggesting the tenant will likely vacate the property upon lease expiration in March. Morningstar DBRS has reached out to the servicer for confirmation; however, as of the date of this press release, a response remains pending. When accounting for the potential departure of Chicago Title, occupancy at the property could decline to slightly above 50.0%, placing further downward pressure on cash flows. Although an updated appraisal has not been ordered since issuance given the lack of delinquency, Morningstar DBRS expects that the property's as-is value has deteriorated considerably given the historical performance trends, lack of leasing activity, and soft submarket fundamentals. Morningstar DBRS liquidated the loan from the pool based on a 75.0% haircut to the issuance value of $166.5 million, resulting in a Morningstar DBRS value of $41.6 million ($53.27 per sf) and an implied loss approaching $50.0 million.

The second-largest loan in special servicing, 1006 Madison Avenue (Prospectus ID#16; 2.7% of the pool), is secured by a 3,917-sf single-tenant retail property in Manhattan, New York. The loan transferred to the special servicer in October 2018 for imminent monetary default, following the departure of the property's sole tenant in late 2018, ahead of its lease expiration in 2025. The collateral has been real estate owned since July 2022. A November 2024 appraisal valued the property at $7.6 million, above the July 2023 value of $6.6 million but a steep decline from the issuance appraised value of $24.0 million. When considering cumulative appraisal subordination entitlement reductions and current advances, the loan's total exposure exceeded $24.0 million as of January 2025. Morningstar DBRS assumed a full loss to the loan in the analysis for this review.

The largest loan on the servicer's watchlist, 4400 Jenifer Street (Prospectus ID#8; 4.0% of pool balance) is secured by a three-story, 83,777-sf Class B office property in the Friendship Heights neighborhood of Washington, D.C. The property was built in 1972 and underwent extensive renovations between 1998 and 1999. The loan was added to the servicer's watchlist in March 2022 after the second-largest tenant vacated prior to its September 2021 lease expiration. The servicer recently approved a lease for 9,786 sf (11.68% of NRA) that commenced in October 2023, noting that the property's occupancy rate has increased to approximately 83.0%. Although operating performance may improve over the subsequent reporting periods, reflective of the uptick in the property's occupancy rate, cash flow has been subdued for an extended period of time and the loan's DSCR has been significantly below break-even since YE2021. According to the most recent rent roll on file, dated August 2024, tenant leases representing approximately 15.0% of the NRA are either operating on a month-to-month basis or are expected to roll within the next 12 months. Morningstar DBRS analyzed the loan with an elevated probability of default penalty and stressed loan-to-value ratio, resulting in an expected loss that was more than double 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 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 (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Classes X-A and X-B 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 (December 13, 2024), https://dbrs.morningstar.com/research/444617

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. 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
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/North American CMBS Insight Model v 1.2.0.0 (December 13, 2024),
https://dbrs.morningstar.com/research/444616
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024),
https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024),
https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (December 3, 2024),
https://dbrs.morningstar.com/research/444064

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.