Morningstar DBRS Downgrades Credit Ratings on Four Classes of Wells Fargo Commercial Mortgage Trust 2016-C32

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C32 issued by Wells Fargo Commercial Mortgage Trust 2016-C32, as follows:

-- Class X-E to B (sf) from BB (sf)
-- Class E to B (low) (sf) from BB (low) (sf)
-- Class F to CCC (sf) from B (low) (sf)
-- Class X-F to CCC (sf) from B (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-3FX 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 B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class X-D at BBB (low) (sf)

Morningstar DBRS changed the trends on Class E and Class X-E to Stable from Negative. All other trends remain Stable, with the exceptions of Class F and Class X-F, which are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

At the prior credit rating action in March 2024, Morningstar DBRS had changed the trends on Class E, Class F, Class X-E, and Class X-F to Negative from Stable, to reflect increased loss projections, driven primarily by the largest loan in special servicing, 10 South LaSalle Street (Prospectus ID #6, 3.9% of the pool). At that time, Morningstar DBRS also noted the potential for further deterioration for that loan and a handful of other underperforming loans.

In the analysis for this review, Morningstar DBRS considered a liquidation scenario for three of the four specially serviced loans, resulting in aggregate estimated losses of $21.5 million, approximately $20.0 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 in March 2024 for that loan reflected an implied loss amount of $12.8 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 issuance appraised value in the analysis for this review. The resulting increase in projected losses to the trust would erode more than half of the nonrated Class G balance, reducing credit support to the lowest rated principal bonds in the transaction, particularly the Class E and Class F certificates, supporting the credit rating downgrades with this review. Additional details are outlined below.

Morningstar DBRS changed the trends 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 the affected classes. Should there be unforeseen circumstances that further increase the risks for the underlying loans in question, Morningstar DBRS notes that the trends could change further and/or the credit ratings could be subject to further downgrades.

As of the January 2025 remittance, 98 of the original 112 loans remain in the pool with an aggregate pool balance of $763.8 million, representing a collateral reduction of 20.4% since issuance. There are 25 loans, representing 14.7% of the pool, that are fully defeased. Specially serviced and watchlisted loans represent 6.2% and 13.7% of the pool, respectively, which are in line with the concentrations at last review. Since the last credit rating action, one loan that was previously in special servicing, Wisconsin Retail Portfolio (Prospectus ID #45), was disposed from the pool with actual losses of $2.1 million, below Morningstar DBRS' expectations at the time of the previous credit rating action of a loss of $3.1 million; one additional loan, Walgreens Portfolio (Prospectus ID #30, 0.9% of the pool), was transferred to special servicing.

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's maturity is in January 2026 and it 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 (T-6) ended June 30, 2024, the property was 67.6% occupied, relatively unchanged from the year-end (YE) 2023 occupancy rate of 71.7%, but considerably below the issuance figure of 89.0%. Net cash flow (NCF) has followed a similar downward trajectory with the most recent full-year reporting from YE2023 reflecting 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 (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 the 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 the property's as-is value to have 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 square foot (psf)) and an implied loss approaching $50.0 million. This treatment is in line with the recent sale of the 70 West Madison property that was reportedly sold in December 2024 for about $55 psf, according to Avison Young.

Morningstar DBRS still has concerns around three previously identified loans backed by office collateral, representing 7.5% of the pool, and four loans backed by other property types, representing 6.2% of the pool, with elevated credit risk because of increased tenant rollover risk and/or other declines in performance. Where applicable, Morningstar DBRS increased the probability of default (POD) penalties, and/or applied stressed loan-to-value ratios for these seven loans. The weighted-average expected loss for these loans is nearly 75% greater than the weighted-average pool expected loss.

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

Class X-A, Class X-D, Class X-E, and Class X-F 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 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, 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/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)

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