Morningstar DBRS Places All Classes of BBCMS 2018-TALL Mortgage Trust Under Review With Negative Implications

DBRS Limited (Morningstar DBRS) placed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-TALL issued by BBCMS 2018-TALL Mortgage Trust Under Review with Negative Implications as follows:

-- Class A rated AAA (sf)
-- Class B rated AA (low) (sf)
-- Class C rated A (low) (sf)
-- Class D rated BBB (low) (sf)

There are no trends for these credit rating actions.

The transaction is secured by the borrower's fee-simple interest in Willis Tower, a 3.9 million-square-foot (sf), Class A office building situated along Wacker Drive in the West Loop submarket of Chicago's central business district (CBD). The collateral includes a 300,000-sf retail and entertainment annex known as the Catalog, which provides access to the Skydeck Observation Deck (Skydeck). The Skydeck features an interactive museum celebrating the history of Chicago's neighbourhoods and historical sites. The observation deck, situated on the 103rd floor, features four glass-floor balconies extending from the tower called the Ledge, which attracts more than 1.3 million visitors annually. In addition, the asset has multiple and diverse income-generating components, including office, retail, Skydeck, and antenna revenue streams.

Although recent leasing momentum at the property has been positive and cash flow trends have consistently improved, surpassing both Morningstar DBRS' and the Issuer's underwritten figures, an updated appraisal was reported with the May 2025 remittance, indicating that the property's appraised value has deteriorated significantly from issuance. Additional details are outlined below. Morningstar DBRS elected to place all rated classes Under Review with Negative Implications to further evaluate the assumptions used in the most recent appraisal report and assess the potential impact to Morningstar DBRS' analytical approach and/or the credit ratings.

The $1.33 billion interest-only floating-rate loan had an initial term of two years with five 12-month extension options. The loan transferred to special servicing in February 2025, ahead of its fully extended maturity date in March 2025. The borrower and special servicer agreed to a loan modification, the terms of which included an extension of the maturity date to March 2028, with two additional one-year extension options to follow, the implementation of cash management provisions, and an equity contribution from the borrower, the majority of which was deposited into an all-purpose reserve account. The loan subsequently transferred back to the master servicer in April 2025.

Although the loan remained current during the short stint in special servicing, the servicer elected to obtain an updated appraisal as part of the process to evaluate the borrower's request for a loan modification. The obtained appraisal, dated February 2025, reflects an aggregate as-is and as-stabilized property value of $1.03 billion and $1.22 billion, respectively (excluding the going concern market value for the Skydeck component which was omitted from the real estate value). The as-is and as-stabilized appraised values increase to $1.40 billion (a variance of approximately -21.0% from the as-is appraised value at issuance of $1.8 billion) and $1.63 billion (a variance of approximately -33.0% from the as-stabilized appraised value at issuance $2.44 billion), respectively, when including the appraiser's going concern market value for the Skydeck component. At issuance, Morningstar DBRS noted that the Skydeck generated approximately 20.0% of the property's total effective gross income.

The Morningstar DBRS Value of $1.2 billion (including $144.7 million of value attributed to the stabilization of the retail and Skydeck components and outstanding office stabilization costs in conjunction with a 75.0% credit applied to the sponsor guarantees) was derived during the April 2024 credit rating action (and maintained during the prior review in March 2025. The Morningstar DBRS Value considered a capitalization rate of 7.5% and a Morningstar DBRS Net Cash Flow (NCF) figure of $82.8 million, which includes the revenue generated from all four distinct components of the property, as noted above. The Morningstar DBRS Value implies a loan-to-value ratio (LTV) of 106.1% compared with the LTV of 128.5% and 108.8%, respectively, on the most recent as-is and as-stabilized appraised values (excluding the going concern market value for the Skydeck component). When including the appraiser's going concern market value for the Skydeck component of the property, the as-is and as-stabilized LTV figures decrease to 94.4% and 81.5%, respectively.

According to the January 2025 rent roll, the office, retail, and broadcast components were 87.0%, 65.8%, and 47.1% occupied, respectively (including current and future signed leases). The largest tenants at the property are United Airlines, Inc. (United; 19.3% of the net rentable area (NRA); lease expiration in 2033), Morgan Stanley Barney Financing LLC (Morgan Stanley; 5.4% of the NRA; lease expiration in 2037), and Seyfarth Shaw LLP (5.4% of the NRA; lease expiration in 2032). Seyfarth Shaw LLP has both a termination option and contraction option for one full floor with a notice date in June 2026 and an effective date the following year.

United gave back more than 100,000 sf of space across three floors in 2021, paying a termination fee of $26.7 million that, according to the loan documents, the borrower was not required to remit to the lender, given the loan was not in a trigger period. The subject property serves as United's headquarters. Although United does not have any future termination options available, the tenant does have a contraction option for up to three full floors (approximately 154,000 sf of NRA) with a notice date in March 2027 and an effective date the following year. Various online sources have suggested that United's recent purchase of a 113-acre parcel of land near Denver International Airport may signal the company is contemplating a relocation of the airline's headquarters, but nothing has been confirmed by the company to date.

As noted above, leasing momentum at the property has been largely positive, with the sponsor, The Blackstone Group L.P. (Blackstone), having signed more than 400,000 sf of leases (between renewals and new contracts) since completing its renovation of the building in 2022. According to the year-end (YE) 2024 financial reporting, the property generated $113.2 million of NCF, reflecting a debt service coverage ratio (DSCR) of 1.24 times (x), compared with the YE2023 and Issuer's underwritten figures of $110.8 million (a DSCR of 1.27x) and $101.9 million (a DSCR of 2.42x), respectively. The improvement in NCF is largely due to increases in base rent and expense reimbursements. According to Q1 2025 Reis, Inc. data, the West Loop submarket had an average vacancy rate of 14.5%, relatively in line with the subject's vacancy rate for the office component. The West Loop submarket's vacancy rate is projected to remain elevated, at above 12.0%, through to 2028.

With this credit rating action, Morningstar DBRS considered several stressed value scenarios given the significant delta between the issuance appraised value and the February 2025 appraised value, all of which resulted in significant downward pressure across the capital stack, supporting the Under Review with Negative Implications designation with this review. Mitigating factors include the Class A status of the property, which is one of the most recognizable properties in the United States and is the third tallest building in the country. The transaction also benefits from strong sponsorship provided by Blackstone, which has invested upward of $490 million toward upgrading the office, retail, and Skydeck space at the property. The building's location in Chicago's CBD, the recently completed renovation program, and the appeal of the Skydeck attraction suggest that the property should continue to remain a draw for both office tenants and visitors. In addition, Morningstar DBRS notes that the in-place cash flows are healthy and remain sufficient to support the outstanding mortgage debt.

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 credit 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/454196 (May 16, 2025).

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

This credit rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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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.

-- Interest Rate Stresses for U.S. Structured Finance Transactions (March 27, 2025): https://dbrs.morningstar.com/research/450750.

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 (July 17, 2023).

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