DBRS Morningstar Confirms All Classes of MKT 2020-525M Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2020-525M issued by MKT 2020-525M Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class X-A at AA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. The transaction is secured by the fee, leasehold, and subleasehold interests in 525 Market Street, a 38-story, 1.1 million-square-foot (sf) Class A office tower in San Francisco’s central business district. Originally built in 1973, the property is primarily configured for office use, with 14,655 sf of retail on the first floor. The Leadership in Energy and Environmental Design (LEED) Platinum building stands out in the South Financial District and is the third-largest building in San Francisco.

Over the past five years, the sponsor has invested approximately $102.1 million, or $99 per sf, of capital into the property, with upgrades including enhancements for the ground-floor retail portion, a repositioned and renovated lobby and plaza, new amenities, and improvements to tenant suites. The three largest tenants are Amazon (39.5% of net rentable area (NRA); lease expiration ranging between 2028 and 2031), Sephora (16.2% of NRA; lease expirations in 2021 and 2023), and Wells Fargo Bank (13.8% of NRA; lease expirations in 2025 and 2026). The average lease term at the property is longer than 10 years, and about 80.0% of the tenants or parent companies are investment grade.

Approximately 80% of the cumulative square footage has lease expirations throughout the 10-year loan term, which could be more meaningful as compared with prior years given the impact to office vacancy rates in San Francisco amid the Coronavirus Disease (COVID-19) pandemic. Reis reported the subject’s submarket vacancy rate at 7.2% for the end of 2020, up from 6.2% a year prior, and forecasts vacancy to increase to 8.7% by the end of 2022. Sephora has its headquarters at the subject, and the majority of its space, representing 11.0% of NRA, expires in October 2021; however, DBRS Morningstar was unable to locate any online listings suggesting that the space is being marketed for lease. The DBRS Morningstar net cash flow of $52.0 million represents a significant haircut to the Issuer’s figure of $60.3 million, providing some cushion against increased leasing volatility through the near to moderate term.

While the most recent financials for the period ended September 30, 2020, reported occupancy at 89.0% with a debt service coverage ratio (DSCR) of 1.77 times (x), down from the Issuer’s DSCR of 2.96x, the property’s physical occupancy rate improved to the Issuer’s level of 97.3% as of February 2021 after an expansion for Amazon was completed. DBRS Morningstar expects the DSCR to move up significantly once the full rent payments for Amazon are included in the reported figures.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X-A is an interest-only (IO) certificate that references 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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