November 2023McKinseyQuarterlyA new way to decarbonizebuildings can loweremissions-profitablyAn AI-informed approach makes it faster,easier,andcheaper 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 fromMcKinsey'Real Estate Practice.Realestate companies are increasingly accepting the imperative to decarbonizebuildings,but they frequently find the task difficult,laborious,and expensive.Owners with portfolios of many unique buildings often have no centralized inventorythat indicates the conditions inside or the types of equipment they contain.What'smore,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 todecarbonization has created a widespread impression that decarbonizing buildings issignificantly unprofitable.But thanks to improvements in the quantity and quality ofdata 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 ofan individual building without ever stepping foot inside.By applying machine learning,Al,and physics-based modeling,portfolio owners canquickly identify building decarbonization opportunities.This includes the current typeand estimated capacity of heating and cooling systems,the site-specific potential forsolar or geothermal power,and where insulation and efficiency levels are substandard.Advanced evolutionary optimization algorithms can then determine the optimal set ofsolutionsand sequence of actions for each building-and the portfolio as a whole-toreach net zeroon a given timeline.These capabilities can quickly generate a set offinancially optimized plans for eachbuilding in a portfolio based on the building's unique star ting point,regulatoryenvironment,lease structure,and many other factors.These plans-which can begenerated for a full portfolio in a matter of weeks-can include a set oftime-boundactions,associated capital costs,and documentation ofthe effect on emissionsandoperating costs.For large portfolios,this novel approach to reaching net zero representsa more than 100-fold increase in the pace and scale ofdecarbonization planningcompared 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 marginalabatement cost curves,which often lead to poorer plans and higher costs.This systemyields specific,detailed,actionable plans with faster abatement and better economics.By developing the full path to net zero,real estate organizations can plan ahead insteadof reacting.They can integrate decarbonization cost insights when deciding whichbuildings to move into or acquire.Because this new approach can rapidly generate a planfor every building,owners and occupiers can decide where to invest limited capital andcoordinate equipment procurement,design,and project management to minimize costs.Additionally,owners can aggregate building-level plans across the portfolio to developcapital plans and repor ting.Building-level plans for energy efficiency and electrificationallow owners and occupiers to estimate and procure required volumes of renewablepower,increase the potential to take advantage of government incentives,and makebuilding managers'jobs easier.This article begins by exploring the importance of adopting a more efficient way todecarbonize buildings.Next,we describe how this new approach often makes it possiblefor real estate portfolios to achieve netzero at a net present value(NPV)that is neutralto positive.For example,we highlight a company that recently developed a net-zeropathway plan that's projected to cost roughly $85 million less than a traditional-approachplan would have cost.Finally,we describe the seven features of a credible buildingdecarbonization plan.Decarbonization efforts are challenging,but a faster,more economical way ofaccomplishing the real estate industry's decarbonization goals provides an opportunityto meaningfully accelerate actions required to limit global warming.Building owners,operators,and occupiers haveobligations to decarbonizeThe real estate industry accounts for approximately 40 percent of global combustion-related emissions,of which 28 percentage points come from building operations and12 from embodied carbon-that is,emissions from building materials and construction(Exhibit 1).To keep global warming within approximately 1.5C and to reach a net-zero-carbon building stock by 2050,the IEA estimates direct building emissions(such as fromonsite gas or oil boilers)will need to be reduced by 50 percent and indirect emissions by2