The insurance market outlook for 2025 shows stabilization in several areas despite continued challenges and evolving risks, leading to a dynamic yet cautious market, according to the “USI 2025 Commercial Property & Casualty Market Outlook."

The report points to signs of stabilization in the property market, with ample capacity available following favorable underwriting results on the insurance and reinsurance side. While policyholders can expect insurers to remain vigilant in risk selection and deductible levels in 2025, some rate relief is expected for favorable risk profiles.

Despite the reinsurance market being well-capitalized, there is no expectation of reinsurers altering their positions and attachment points on the upcoming treaty renewals, according to USI. Although the 2024 U.S. hurricane season was initially slow to develop, activity rapidly escalated with the arrival of Hurricanes Helene and Milton—the latter leading to expected insured losses between $22 billion and $36 billion, making it the largest loss driver for property insurance in 2024.

As the market evolves, here are three commercial property trends to watch this year:

1) Reconstruction costs continue to rise. After the unprecedented inflation and supply-chain disruption between 2020 and 2023, construction costs have stabilized. However, prices continue to rise, albeit less dramatically and more unevenly. Concrete block, rebar, steel deck and steel studs remain elevated, while drywall, lumber, galvanized pipe and plywood have decreased in price. Nationally, material costs are up 2% while labor costs have risen 3.8% as of September 2024, according to USI.

During the hard market, many policies introduced valuation clauses like margin clauses, occurrence limit of liability, scheduling and coinsurance, which affect recovery after a claim if valuations are insufficient, the USI report said. “Not updating values annually may result in large, uncovered claims due to these clauses. As the market continues to shift, proper valuations will lead to fewer policy restrictions and better outcomes after a loss," according to USI.

2) Escalating vacancy rates create challenges. Vacancy rates for office buildings hit a record 19.6% in 2023 due to the rise of remote and hybrid work, with a 24% vacancy rate expected by early 2026, according to Moody's analytics.

Once a building reaches less than 31% occupancy by square footage, insurers often limit coverage, impose protective safeguard requirements and can even exclude losses on these properties entirely. Therefore, “identifying current occupancy rates by location well in advance of a renewal will allow for a more strategic approach to cover these properties," the USI report said.

Meanwhile, with more vacant office properties, the pressure is on commercial real estate owners to repurpose these buildings to maximize returns. Since 2021, office-to-apartment conversions have skyrocketed 357%, producing over 55,000 new housing units, according to ResiClub.

“Insureds looking to complete a conversion must start the insurance purchasing process well in advance of the project start date," according to the USI report. “These programs often require multiple insurers to build the necessary capacity and terms, which can take months, depending on total values at stake. Therefore, the key to insuring these projects is to allow adequate time for underwriting and placement."

3) Pressure on wildfire-exposed risks. Wildfire exposure continues to challenge insurance placements and heighten concerns for insurers.

As of November 2024, over 8 million acres had burned across 10 states in 2024—24% higher than the 10-year average. Significant fires like California's Park fire, Texas' Smokehouse Creek fire, the South Fork and Salt fires in New Mexico, and the Watch fire in Arizona have all contributed to the issue.

However, after the catastrophic and costly wildfires in the Los Angeles area in January, the pressure from wildfire is exerting itself not only on exposed areas but on the property market as a whole due to an estimated $40 billion of insured losses.

“None of these alternatives come without risks to consider," according to USI, including limited coverage and high premiums.

“Difference-in-condition (DIC) wrap policies can be used to fill in coverage gaps created by the FAIR Plan, but coverage gaps can still exist," the report said. “Although some insureds in high-risk areas may have limited options, understanding the coverage offered, exclusions and triggers for claim payment is key."

Will Jones is IA editor-in-chief.