Morningstar DBRS Confirms Credit Ratings on All Classes of SOHO Trust 2021-SOHO

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-SOHO issued by SOHO Trust 2021-SOHO as follows:

-- Class A at A (low) (sf)
-- Class B at BBB (low) (sf)
-- Class C at BB (low) (sf)
-- Class D at B (sf)
-- Class HRR at B (sf)

All trends are Stable.

The credit rating confirmations and Stable trends reflect the overall stable performance and outlook for the collateral office property, a 786,891-square-foot (sf), Class A office/retail property known as One SoHo Square, comprising two adjacent mid-rise office buildings separated by an adjoined 19-story glass tower on the northwest corner of Sixth Avenue and Spring Street in Manhattan's SoHo neighborhood. The sponsor acquired the buildings in 2012 and spent nearly $270.0 million in upgrades to reposition the property within the neighborhood as a top-tier office and retail complex.

The analysis for this credit rating action maintained the value approach from the last credit rating action, when the Morningstar DBRS Value was updated to reflect an increased capitalization (cap) rate of 7.0%, up from the cap rate of 6.6% applied as part of the analysis at issuance in 2021. The increased cap rate reflected Morningstar DBRS' view that office property types are inherently riskier than they were in the pre-coronavirus pandemic times. The approximately 40 basis points (bps) increase in the cap rate for the subject compared with the average increase of 70 bps for the cap rates for all Single-Asset/Single-Borrower transactions included in the April 15, 2024, bulk credit rating action. Based on the 7.0% cap rate and the Morningstar DBRS NCF figure of $54.7 million--maintained from issuance--the resulting Morningstar DBRS Value was $781.3 million, which results in a loan-to-value (LTV) ratio of 100.5% on the full mortgage debt amount of $785.0 million. The appraised value at issuance was $1.35 billion, resulting in an LTV of 58.0%. The LTV sizing also considered qualitative adjustments totaling 6.0%, reflecting credits for cash flow volatility, property quality, and market fundamentals.

Whole mortgage loan proceeds of $785.0 million include senior A-note debt in the amount of $470.0 million and junior B-note debt, totaling $315.0 million. There is also $120.0 million of mezzanine debt in place. The subject transaction totals $316.0 million and consists of three senior A notes with an aggregate principal balance of $1.0 million and the full B-note debt. The remaining companion senior A notes are securitized in other transactions not rated by Morningstar DBRS. The mortgage debt has a fixed interest rate and is fully interest only, maturing in August 2028 with no built-in extension options. The sponsor, Stellar Management, has 40 years of ownership and management experience in New York City and currently owns almost 3.0 million sf of office space, and more than 13,000 residential units in New York City.

The property benefits from its investment-grade tenancy, which includes the three largest tenants at the property: Flatiron Health (Flatiron; 32.4% of the net rentable area (NRA), expiring February 2031 and November 2034), Aetna Inc. (13.3% of the NRA, expiring July 2029), and MAC Cosmetics (11.1% of the NRA, expiring March 2034). According to the September 30, 2024, rent roll, the property was 88.2% occupied, flat from YE2023 and less than 93.0% at YE2022. The property's fifth-largest tenant, Warby Parker (10.4% of the NRA) showed lease expirations in January and February 2025 as of the September 2024 rent roll, but a January 2025 article in the New York Business Journal stated the company, which houses its headquarters at the subject property, renewed the lease. Details of the renewal have been requested from the servicer.

Remaining scheduled rollover through the loan term represents approximately 6.0% of the NRA. However, there is a notable amount of sublease space available at the property, with Juul Labs (Juul, 6.9% of the NRA, expiring May 2032) previously offering the entirety of its 55,105-sf space and later securing a tenant for one of its two floors in late 2022. The property's largest tenant, Flatiron, previously listed nearly half of its leased space for sublease, but that was later significantly reduced. A Commercial Observer article dated December 2024 reported that Evergreen Trading had signed a sublease for part of the Flatiron space, taking 20,309 sf, moving from 99 Hudson Street. As of March 2025, Morningstar DBRS located listings, which suggested 50,000 sf of space (6.3% of the NRA) across the fifth and sixth floors at the One SoHo Square West building (161 Avenue of the Americas) was listed for sublease; this space appears to be part of Flatiron's space for which the lease expires in November 2034. In addition, a listing for 30,064 sf (3.8% of the NRA) on the eighth floor of the One SoHo Square East building (633 Spring Street) was listed for sublease, which appears to be space leased to Juul through May 2032.

Office tenants at the property showed an average rental rate of $96.96 per square foot (psf) as of the September 2024 rent roll, which, according to Reis, is higher than the average asking rental rate of $72.50 psf as of Q4 2024. The subject's vacancy rate of approximately 12.0% as of September 2024 compares to the submarket's overall vacancy rate of 15.7% at Q4 2024; Reis projects the submarket vacancy rate will decline incrementally over the next several years, with the 2028 baseline vacancy rate forecast at 10.5%.

For the trailing nine months ended September 30, 2024, the annualized net cash flow (NCF) was reported at $58.1 million (reflecting a debt service coverage ratio (DSCR) of 2.08 times (x)), just less than the YE2023 figure of $58.8 million (a DSCR of 2.11x) and the DBRS Morningstar NCF of $54.7 million. Although there is some subleasing activity and the loan's leverage point is considered high, these risks are mitigated by the property's strong tenancy, minimal scheduled tenant rollover through the remaining loan term, and desirable location with significant capital improvements by the sponsor to bring the overall property quality up significantly.

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.

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 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.

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 Single-Asset/Single-Borrower Ratings Methodology (February 28, 2025); https://dbrs.morningstar.com/research/448962
-- 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.

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