Botsford: It's important to look at the economic drivers within those secondary markets as well as depth and critical mass. Lenders are looking at the depths of secondary markets, and they want a critical mass of that product type; if it's an office asset, then they want to see other investments into office product and other lenders in that market as well. Only a handful of either is a concern for lenders. Debt drives value, so if there's a lack of lending in that market, they will have lack of liquidity. Make sure in the markets you're looking at you can clearly define where the cash flow is coming from on that property and why it will be stable and consistent per your underwriting, and make sure there's depth in that sector or a critical mass.

GlobeSt.com: What other trends are you noticing?

Botsford: One of the trends we're seeing specifically within office and across the lending markets today is more conservative underwriting. Investors should be cognizant of this in any market. From the second quarter to the third quarter of 2016, all six of the metrics we cover trended conservatively, yet the real estate market in Q3 still had historically low rates. On larger loans, 42% of those loans had coupon rate of 4% or less, and that's in the third quarter of this year. Generally speaking, with all lenders, they're pulling back and underwriting in a more conservative fashion than they did in Q2 of 2016. We're still seeing great execution and great rates, but how long will that last?

GlobeSt.com: What else should our readers know about financing trends in secondary markets?

Botsford: With these two recent deals, one approach we thought was unique was having two debt funds work together as one lender. We recommended pairing a bridge and a mezzanine loan to provide one loan for our client. This structure enabled us to achieve the desired loan amount while at a more competitive rate. These deals are unique because we got two debt funds to work together that had never done so to satisfy all of our client's needs.

Also, with these transactions as well as others, one of the emerging trends is the growth of debt funds or nonbank lenders—that was a big trend in 2016. In Q3, 20% of deal volume was non-bank lenders, which we categorize as REITs, pension funds and private lenders. This will continue to grow, and non-bank lenders will continue to be active, especially in the construction, value-add and mezzanine-finance areas.

NEWPORT BEACH, CA—Solid economic drivers as well as depth of investors and critical mass of that product type are a few of the things lenders look for before underwriting loans in non-core markets, MetroGroup Realty Finance's VP Scott Botsford tells GlobeSt.com. A private commercial-mortgage banking firm based here, MetroGroup recently restructured the debt on an office building in Denver and an office/flex building in San Antonio for a total of $50.3 million, arranged by Botsford. We spoke with him about the secondary markets, discussing which are hot for financing and which are worrisome.

GlobeSt.com: Which secondary markets are hot for financing, and which are worrisome?

Botsford: The obvious answer there for me is the tech hubs—those markets that have some sort of tech driver—as well as other markets that have a definitive, stable employment driver. The office segment in secondary markets throughout the US continues to perform well, especially in Texas and Colorado, which we believe is due to population and job growth. Investors are reaching their investment objectives, but they're slightly different than core—there are higher cap rates in secondary markets and lower overall returns from rent growth and capital appreciation, so investors are achieving same result but through different routes. Core markets offer lower cash-on-cash return, but investors are anticipating more rent growth and capital appreciation for a similar total return; secondary markets are more cash-flow focused, and you really need to understand the employment drivers or what's going to continue that cash flow. It's such a critical component to getting to the total-return threshold on what they're underwriting.

GlobeSt.com: What should investors keep in mind in these markets?

Botsford: It's important to look at the economic drivers within those secondary markets as well as depth and critical mass. Lenders are looking at the depths of secondary markets, and they want a critical mass of that product type; if it's an office asset, then they want to see other investments into office product and other lenders in that market as well. Only a handful of either is a concern for lenders. Debt drives value, so if there's a lack of lending in that market, they will have lack of liquidity. Make sure in the markets you're looking at you can clearly define where the cash flow is coming from on that property and why it will be stable and consistent per your underwriting, and make sure there's depth in that sector or a critical mass.

GlobeSt.com: What other trends are you noticing?

Botsford: One of the trends we're seeing specifically within office and across the lending markets today is more conservative underwriting. Investors should be cognizant of this in any market. From the second quarter to the third quarter of 2016, all six of the metrics we cover trended conservatively, yet the real estate market in Q3 still had historically low rates. On larger loans, 42% of those loans had coupon rate of 4% or less, and that's in the third quarter of this year. Generally speaking, with all lenders, they're pulling back and underwriting in a more conservative fashion than they did in Q2 of 2016. We're still seeing great execution and great rates, but how long will that last?

GlobeSt.com: What else should our readers know about financing trends in secondary markets?

Botsford: With these two recent deals, one approach we thought was unique was having two debt funds work together as one lender. We recommended pairing a bridge and a mezzanine loan to provide one loan for our client. This structure enabled us to achieve the desired loan amount while at a more competitive rate. These deals are unique because we got two debt funds to work together that had never done so to satisfy all of our client's needs.

Also, with these transactions as well as others, one of the emerging trends is the growth of debt funds or nonbank lenders—that was a big trend in 2016. In Q3, 20% of deal volume was non-bank lenders, which we categorize as REITs, pension funds and private lenders. This will continue to grow, and non-bank lenders will continue to be active, especially in the construction, value-add and mezzanine-finance areas.