November 2023 A new way to decarbonize buildings can lower emissions—profitably An AI-informed approach makes it faster, easier, and cheaper to decarbonize real estate. Here’s how. This article is a collaborative effort by Brodie Boland, Daniel Cramer, Alastair Green, Darya Guettler, Focko Imhorst, and Marita Winslade, representing views from McKinsey’ Real Estate Practice. Real estate companies are increasingly accepting the imperative to decarbonize buildings, but they frequently find the task difficult, laborious, and expensive. Owners with portfolios of many unique buildings often have no centralized inventory that indicates the conditions inside or the types of equipment they contain. What’s more, physical energy audits and building-by-building net-zero plans are lengthy, costly, and enjoy no benefits of scale. Due to these limitations, the traditional approach to decarbonization has created a widespread impression that decarbonizing buildings is significantly unprofitable. But thanks to improvements in the quantity and quality of data and analytic methods, there is a better approach. It is now possible to use a combination of data from satellites, geospatial analytics, regulations, labor and equipment costs, building characteristics, energy, and other sources to rapidly create a high-fidelity picture of the current state of an individual building without ever stepping foot inside. By applying machine learning, AI, and physics-based modeling, portfolio owners can quickly identify building decarbonization opportunities. This includes the current type and estimated capacity of heating and cooling systems, the site-specific potential for solar or geothermal power, and where insulation and efficiency levels are substandard. Advanced evolutionary optimization algorithms can then determine the optimal set of solutions and sequence of actions for each building—and the portfolio as a whole—to reach net zero on a given timeline. These capabilities can quickly generate a set of financially optimized plans for each building in a portfolio based on the building’s unique starting point, regulatory environment, lease structure, and many other factors. These plans—which can be generated for a full portfolio in a matter of weeks—can include a set of time-bound actions, associated capital costs, and documentation of the effect on emissions and operating costs. For large portfolios, this novel approach to reaching net zero represents a more than 100-fold increase in the pace and scale of decarbonization planning compared with the traditional approach of conducting energy audits and net-zero studies. It also eliminates the need to rely on vague building archetypes or general marginal abatement cost curves, which often lead to poorer plans and higher costs. This system yields specific, detailed, actionable plans with faster abatement and better economics. By developing the full path to net zero, real estate organizations can plan ahead instead of reacting. They can integrate decarbonization cost insights when deciding which buildings to move into or acquire. Because this new approach can rapidly generate a plan for every building, owners and occupiers can decide where to invest limited capital and coordinate equipment procurement, design, and project management to minimize costs. Additionally, owners can aggregate building-level plans across the portfolio to develop capital plans and reporting. Building-level plans for energy efficiency and electrification allow owners and occupiers to estimate and procure required volumes of renewable power, increase the potential to take advantage of government incentives, and make building managers’ jobs easier. This article begins by exploring the importance of adopting a more efficient way to decarbonize buildings. Next, we describe how this new approach often makes it possible for real estate portfolios to achieve net zero at a net present value (NPV) that is neutral to positive. For example, we highlight a company that recently developed a net-zero pathway plan that’s projected to cost roughly $85 million less than a traditional-approach plan would have cost. Finally, we describe the seven features of a credible building decarbonization plan. Decarbonization efforts are challenging, but a faster, more economical way of accomplishing the real estate industry’s decarbonization goals provides an opportunity to meaningfully accelerate actions required to limit global warming. Building owner