It's the start of a new year and commercial banks are setting their sights on the market trends that have the biggest potential to influence lending strategies in the months ahead.
Against a backdrop of rapidly advancing technology, geopolitical tensions, worsening climate catastrophes, and evolving regulatory expectations, leaders are navigating a complex landscape.
Here are four key trends impacting lenders that we’re watching as we settle into 2025:
1. Surging CRE insurance premiums
The commercial real estate (CRE) sector is facing an undeniable insurance crisis, driven by increasingly frequent and severe weather events. Research from Deloitte suggests a concerning forecast: premiums in high-risk areas could double by 2030 as insurers increasingly withdraw from vulnerable regions. To put this in perspective, a commercial property currently paying $100,000 annually in premiums might face costs of $200,000 or more by decade's end if current climate trends persist.
The financial implications for property owners are significant. Insurance costs now consume up to 13.4% of property revenue in high-risk areas, nearly double the 6.7% share recorded in 2018 (MPA). This dramatic increase directly impacts businesses' ability to generate enough income for loan payments and maintain profitability.
For lenders, these hurdles demand a fundamental reassessment of risk evaluation practices. Properties in traditionally "safe" areas are now facing heightened scrutiny as recent storms have demonstrated how damage can extend well beyond coastal zones. As insurance costs continue to rise and coverage becomes more difficult to secure, property values in high-risk areas face downward pressure, complicating both refinancing options and exit strategies for current borrowers.
2. Geopolitical pressures and instability
The major events of the world have always been an important consideration for banks, which monitor many factors that could impact borrowers' ability to maintain strong cash flows and meet debt obligations. This year won’t be any exception.
A new U.S. Presidential administration has ushered in a period of market uncertainty, including around fiscal priorities, interest rates, and climate policy and regulations. With potential shifts in environmental commitments and federal climate initiatives, banks are reassessing how changes in U.S. policy could affect both regulatory requirements and their borrowers' business operations. The possible withdrawal from global climate agreements and rollback of environmental regulations could reshape lending risk assessments, especially for projects and industries heavily impacted by climate policy.
Uncertainty surrounding U.S. domestic policy is compounded by ongoing global conflicts. The continued war in Ukraine and escalating tensions in the Middle East have disrupted supply chains and energy markets, making lenders reassess their exposure across some sectors. Such geopolitical pressures can have implications for CRE lending if property valuations and operational costs are impacted by energy prices and supply chain disruptions.
3. Commercial lenders embrace AI
The banking sector is experiencing a tech transformation as major financial institutions adopt the latest artificial intelligence (AI) tools and capabilities. From organizing vast amounts of unstructured data needed to assess portfolios to automating routine credit analysis tasks, AI can transform how lenders evaluate and monitor risk. The tech can cut back on the time and resources needed to process complex datasets, like property valuations, insurance claims, and borrower financials to identify early warning signs and maintain portfolio health. It also offers promising solutions around enhancing fraud detection, streamlining regulatory compliance, and enabling more accurate risk modelling.
Recent research from Alkami shows that 44% of financial institutions are already investing in AI-powered fraud detection and security solutions (Financial Brand). From the biggest commercial lenders to emerging fintech players, AI adoption in banking will continue to grow.
4. Intensifying climate risk
The impact of severe climate-related events on commercial lending portfolios has become impossible to ignore. In 2024, natural catastrophes caused $320 billion in economic losses globally, making it one of the costliest years in history (MunichRe). Hurricanes Helene and Milton alone caused combined losses of $94 billion
Now, experts predict that the Southern California wildfires that marked the start of 2025 could be most expensive disaster in history for the U.S. The increasing frequency and intensity of these events forces banks to rethink risk assessment models and face the reality that climate risk is credit risk.
While most commercial lenders now incorporate climate risk modeling in their underwriting processes, the priority extends beyond just protecting portfolio performance. As regulatory requirements for climate-related reporting and risk disclosure continue to evolve, banks must have frameworks for understanding, managing, and documenting their risks. This dual pressure – from both market forces and regulatory mandates – ensures that climate risk will remain a top focus for banks.
Building portfolio resilience in 2025
The challenges facing commercial lenders demand proactive leadership and the adoption of advanced solutions to navigate risk effectively. Forward-thinking banks are already using advanced analytics and risk modelling to not only safeguard their portfolios but also to anticipate and mitigate risks before they materialize.
ONCI’s tools combine data-driven insights with deep industry expertise to help lenders build more resilient portfolios. Send us a note today at hello@onci.com to learn how our technology can help you stay ahead of market challenges in 2025.