Non-Agency CMBS
Non-agency CMBS are commercial mortgage-backed securities backed by pools of commercial real estate loans that are not guaranteed by any government-sponsored enterprise, encompassing a wide variety of property types including office, retail, hotel, industrial, and mixed-use assets, with credit risk borne entirely by private investors.
Non-agency CMBS — sometimes called private-label CMBS — represents the broader commercial real estate securitization market beyond the agency multifamily programs. Unlike agency CMBS, which carry GSE guarantee backing and are limited primarily to apartment properties, non-agency CMBS are backed by mortgage loans on a diverse array of commercial property types: office towers, regional shopping malls, hotel chains, industrial parks, self-storage facilities, net lease assets, and mixed-use developments. The absence of a government guarantee means investors in non-agency CMBS are exposed to actual credit risk from the underlying commercial real estate loans.
The conduit CMBS market — where dozens or hundreds of individual commercial mortgage loans are pooled and securitized — is the dominant form of non-agency CMBS. Conduit loans are typically fixed-rate, 10-year mortgages originated by investment bank lending programs with the express intent of securitization rather than portfolio retention. Because the originating lender knows the loan will be sold into the capital markets, the loan terms are standardized to meet the documentation and underwriting requirements of rating agencies and investors. Major rating agencies — DBRS Morningstar, Fitch Ratings, Kroll Bond Rating Agency, and S&P Global Ratings — analyze conduit pools and assign ratings to each tranche based on their assessment of expected losses.
In addition to conduit transactions, the non-agency CMBS market includes single-asset single-borrower (SASB) transactions, in which a large loan on a single commercial property or portfolio of properties is securitized and sold to investors. SASB deals allow for greater transparency into the specific collateral and borrower, and have become increasingly common for large, complex real estate financings where the bespoke nature of the collateral does not lend itself to pooling with diverse conduit loans.
The non-agency CMBS market suffered severe disruptions during the 2008-2009 financial crisis as commercial real estate values plummeted and loans originated during the 2005-2007 origination bubble defaulted at high rates. Losses were concentrated in junior and mezzanine CMBS tranches, and many junior bondholders were wiped out entirely. The market recovered gradually through the 2010s, with improved underwriting standards and the implementation of Dodd-Frank risk retention rules in 2016 adding investor protections.
For investors, non-agency CMBS offers access to commercial real estate credit risk in a tradable, liquid format. Junior CMBS tranches — particularly B-piece and CCC-rated certificates — offer equity-like returns with debt seniority, making them a favored tool for commercial real estate debt fund managers seeking high current income. Understanding the credit quality, loan concentrations, property type exposure, and servicer quality within a given CMBS pool is essential due diligence for any non-agency CMBS investor.