Morningstar DBRS Downgrades Credit Ratings on Six Classes of Wells Fargo Commercial Mortgage Trust 2016-C33, Changes Trend on One Class to Negative From Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on six classes of Commercial Mortgage Pass-Through Certificates, Series 2016-C33 issued by Wells Fargo Commercial Mortgage Trust 2016-C33 as follows:

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

In addition, Morningstar DBRS confirmed its credit ratings on the following classes:

-- 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 B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)

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

The credit rating downgrades and Negative trends reflect Morningstar DBRS' increased loss projections for the pool, primarily driven by the specially serviced loan, Omni Officentre (Prospectus ID#10, 2.8% of the current pool balance). Morningstar DBRS analyzed the loan with a liquidation scenario based on an updated appraisal showing significant value decline from issuance. Liquidated losses would erode approximately half of the nonrated Class G certificate principal balance, reducing credit support for Classes D, E, and F. Additionally, Morningstar DBRS has concerns regarding the significant concentration of loans collateralized by office properties, which cumulatively comprise 27.2% of the pool balance, a contributing factor for the credit rating downgrades and the Negative trend on Class C. Of particular concern is the second-largest loan on the servicer's watchlist, Brier Creek Corporate Center I & II (Prospectus ID#7, 3.8% of the current pool balance), backed by a portfolio of two Class B office buildings in Raleigh, North Carolina, that have suffered performance declines following the loss of two large tenants in 2020 and 2021. Morningstar DBRS also notes that Business & Research Center at Garden City (Prospectus ID#4, 6.2% of the pool), the pool's second-largest office loan, has two tenants in place through 2029 for just under 95.0% of the net rentable area (NRA); however, Loopnet shows approximately 22.0% of the NRA at the flex (office/industrial) property as available for lease as of March 6, 2025, suggesting there may be some dark space that could complicate a refinance.

Morningstar DBRS also notes that interest shortfalls continue to accumulate for the nonrated Class G certificate, attributed primarily to the Brier Creek Corporate Center I & II loan. Although shortfalls are currently contained to the first loss certificate, Morningstar DBRS expects those will increase and move up the capital stack as the maturity dates for the underperforming office loans get closer and as loans that cannot refinance are transferred to special servicing.

The credit rating confirmations higher in the capital stack reflect Morningstar DBRS' view that most of the loans in the pool are performing generally in line with issuance expectations, with loans secured by retail, hotel, self-storage, and multifamily property types representing 16.6%, 12.1%, 12.0%, and 10.9% of the pool, respectively. In addition, the pool benefits from 17 defeased loans, which represent 20.5% of the pool balance. Scheduled loan repayments and amortization have reduced the balance of the top two classes at issuance, Classes A-1 and A-2, to zero, with Class A-3 paid down by just over one-third as of the February 2025 remittance. The pool's largest office loan, 225 Liberty Street (Prospectus ID#3, 8.0% of the pool), is shadow-rated investment grade, and loans representing more than 20.0% of the pool are reporting debt service coverage ratios (DSCRs) in excess of 2.0 times.

As of the February 2025 remittance, 66 of the original 79 loans remained in the pool, with a current trust balance of $506.9 million, representing a collateral reduction of 28.8% since issuance. The trust has incurred just under $1.0 million in realized losses to date, contained to the nonrated Class G certificate. There are nine loans (24.9% of the current pool balance) on the servicer's watchlist and one loan in special servicing (the aforementioned Omni Officentre loan). Since the previous credit rating action, the Holiday Inn Express & Suites Columbia loan (Prospectus ID#30, previously 1.3% of the pool) has been disposed, with a $100,000 realized loss to the trust.

The Omni Officentre loan is secured by two suburban Class B office buildings in Southfield, Michigan, totaling 294,090 square feet (sf). The former largest tenant, Blue Cross Blue Shield (BCBS) (previously 40.0% of the NRA), vacated the property in January 2020 prior to its June 2022 lease expiration. Although the tenant continued paying rent until the end of the lease term, the departure triggered a cash flow sweep. Without BCBS, the property's in-place cash flow fell below breakeven, leading to a transfer to special servicing in August 2022 when the borrower was unwilling to fund shortfalls or otherwise contribute additional capital to the property. A receiver has been appointed, and an auction sale is to be scheduled for the coming months. The servicer's August 2024 site inspection reported an occupancy rate of just 16.9% for the property. Even before BCBS' departure, occupancy had been declining, with the servicer reporting an occupancy rate of 61.4% at YE2021, down from 81.0% at issuance. By means of comparison, the North Southfield submarket had a Q4 2024 average vacancy rate of 27.1%, according to Reis. The property was appraised in September 2024 for $4.8 million, an 80.0% decline from the issuance appraisal value of $24.0 million. Morningstar DBRS analyzed the loan with a liquidation scenario by applying a 30.0% haircut to the September 2024 appraised value, resulting in a full loss to the loan.

Brier Creek Corporate Center I & II has been on the servicer's watchlist for low occupancy and DSCR since September 2021, following the departure of the two former largest tenants, Stock Building Supply (previously 25.0% of the NRA) and UCB Biosciences (previously 50.0% of the NRA), in 2020 and 2021, respectively. According to the September 2024 rent roll, the subject was just 36.0% occupied, down from 94.0% at issuance. By comparison, the Research Triangle Park submarket reported a Q4 2024 vacancy rate of 28.4%, according to Reis. Given the performance declines and likely resulting sharp decline in the property's as-is value, Morningstar DBRS considered a stressed scenario in the analysis for this loan. Morningstar DBRS applied a 40.0% probability of default penalty and stressed the loan-to-value ratio based on a 75.0% haircut to the issuance appraised value, resulting in an expected loss that is more than three times the pool average.

One loan, 225 Liberty Street, was shadow-rated investment grade by Morningstar DBRS at issuance. The subject, sponsored by Brookfield, is the largest of the four Brookfield Place towers, a development that consists of 7.1 million sf of office space and approximately 340,000 sf of lifestyle-oriented retail and public space. This loan is part of a $900 million whole loan that is secured by a 2.4-million-sf Class A office property in Manhattan's Downtown West submarket. The specific $40.5 million Note A-1F is included in the senior loan amount of $459 million, while the remainder of the whole loan is structured as a subordinate B note securitized in the 225 Liberty Street Trust 2016-225L single-asset/single-borrower transaction, which is also rated by Morningstar DBRS. The collateral property has maintained a stable occupancy rate between 90% and 95% since issuance. With this review, Morningstar DBRS confirmed that the loan's performance remains in line with the investment-grade shadow rating.

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, X-D, X-E, and 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 (February 28, 2025), https://dbrs.morningstar.com/research/448963.

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.

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 (December 13, 2024)/North American CMBS Insight Model version 1.2.0.0, 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
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

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.