Digital and AI tools realize neutral or positive returns for decarbonization of real estate portfolios

The real estate sector is responsible for around 40% of global greenhouse gas emissions. In 2020, the IEA estimated that direct building emissions will need to be reduced by 50% and indirect emissions by 60% by 2030 to reach net zero carbon building stock by 2050. It is in investors' and portfolio owners' best interests to take action to minimize climate impacts through decarbonization. 

Ansarada’s 2025 Real Estate M&A Outlook report shows that investors are now focused on digitalization, decarbonization, and demographics as major social and economic trends driving future real estate investment. Technological and social change now play a much bigger role in asset selection, previously dominated by geographic and opportunistic criteria. 

Decarbonization is essential for long-term asset value. Properties with poor environmental performance experience a ‘brown discount’, while sustainable buildings benefit from premium rents and higher occupancy rates.

Digital and electric strategies for decarbonization of real estate assets 

As unsustainable buildings become undesirable, the demand for new or retrofitted buildings with a focus on sustainability grows in the commercial real estate and domestic markets.

In some cities, including New York and Tokyo, building codes mandate energy efficiency standards. While the initial investment is considerable, there can be tax benefits, and lower costs in the long run, making the property more appealing to tenants. So where to begin? 

What is the decarbonization of real estate?

Decarbonizing real estate means targetiâg and reducing both operational and embodied emissions.

Operational emissions are the greenhouse gas emissions produced by powering heating, cooling, lighting, and equipment inside buildings. They typically account for around 65% of real estate emissions, while the remaining 35% comes from embodied emissions.

Embodied emissions are the greenhouse gas emissions associated with building materials and construction processes throughout a building’s lifetime.

Establish a baseline for greenhouse gas emissions accounting

The first step to decarbonizing commercial real estate is undertaking a precise greenhouse gas emissions inventory. With this information, targets can be set to reduce greenhouse gas emissions.

Investors may account for greenhouse gas emissions at the portfolio level, differentiating on-site fossil fuel use from grid electricity with estimates where data is sparse.

AI-informed decarbonization planning

AI-modeling scenarios for decarbonization allow portfolio owners to receive advice quickly that can be standardized across common building types. These scenarios employ data from satellites, geospatial analytics, regulations, labor and equipment costs, building characteristics, and other sources to create a high-fidelity model of buildings, at scale.

With digital modeling, a decarbonization plan for an entire real estate portfolio can be created in weeks, increasing the pace and scale of decarbonization planning. Building-level plans also allow procurement of renewable power using estimates, allowing building managers to take advantage of government incentives.

Creating a portfolio-level decarbonization plan enables investors to reduce capital costs by coordinating projects and negotiating bulk procurement pricing. Once implemented, costs are recovered through lower utility bills and avoiding existing regulatory penalties. 

Decarbonization and operational energy efficiency

Engineering and professional services firm WSP did a study with Schnieder to determine how effective a ‘digital first’ approach to renovating buildings for better energy efficiency could be. The study found that most digital energy conservation solutions reduce carbon emissions within the first year of use.

Modeling thousands of scenarios based on a typical early 2000s large office building in the US to compare energy conservation methods found that a digital and electric approach to upgrading existing office buildings could reduce operational carbon emissions by up to 42%, with a payback period of less than 3 years. If in addition to electric upgrades, fossil fuel heating is replaced by electricity and a microgrid with local renewable energy sources is installed, an additional 28% reduction can be achieved, bringing the total potential carbon savings up to 70%.

The added benefit of deploying digital technologies to reduce carbon emissions is that it is less disruptive on daily operations and more financially viable as an initial step towards decarbonization.

Energy reducing methods (ECMs) modeled included:

Improving existing building stock

Renovations to existing building stock to conserve energy include upgrading windows, adding insulation, and sealing the envelope to reduce draughts.

Upgrading equipment

Building equipment, including lights, sensors, and power management transformers, can be upgraded to create a more energy-efficient system. Electrification provides long-term cost savings along with protection from natural gas price volatility.

Digital optimization with AI, IOT sensor networks, and advanced lighting controls

Electricity use can be optimized using AI and by introducing IOT sensor networks for zone-level management. Advanced lighting controls can also conserve energy.

Steps to decarbonization

1. Install energy efficiency measures to reduce operating costs

Optimizing operating expenses with digital and AI technologies is the first step towards net zero.

2. Align near-term capital investments with long-term decarbonization plans

Capital investments to improve building stock and upgrade major equipment at the end of life should align with the broader decarbonization goals. This ensures capital is spent effectively and removes the need to retire equipment before the end of its useful life as part of decarbonization.

This strategy avoids stranded capital investments like roofs and major equipment, such as heating, which has a useful life of 10-25 years.

3. Avoid regulatory penalties

Fossil-fuel-powered assets should be replaced before the mandatory compliance date for each region to avoid the cost of regulatory penalties.

4. Coordinating major renovations and upgrades to reduce costs

Sharing labor, project management, design, crane hire, and so on can reduce the installation costs of improvements including rooftop heating, ventilation, and air conditioning.  Bulk discounts can be negotiated for major equipment required across the portfolio, such as HVAC and building envelope needs.

5. Review lease structures to ensure owners benefit from energy savings

Where decarbonization investments yield savings for tenants, updating the lease structure ensures that owners receive a share of the energy savings.

6. Renewable power procurement

Power procurement strategies should align with the electrification timeline to ensure that large contracts can be secured at reasonable costs, avoiding a last-minute rush and higher costs as net-zero dates approach.

7. Apply for decarbonization incentives

Many cities and countries offer incentives and tax breaks for decarbonizing building stock. Identifying these in each region and planning to apply for each ensures that the capital benefits can be realized and offset installation costs.

Does decarbonization truly pay off?

Based on the detailed decarbonization of around 20,000 buildings, including various property types and geographies and more than 15 megatons of CO2 equivalent annual emissions, McKinsey’s conservative estimate concluded that using digital technology and electric emissions reduction solutions, real estate portfolios could achieve net zero with neutral to positive return on investment, as savings meet or exceed costs over time.

Collaborate seamlessly with stakeholders to decarbonize real estate assets, meet regulatory deadlines and realize a strong return on investment

Owners and tenants share common goals to reach net zero, even if timeframes, interim targets and the scopes of work may vary. Close collaboration between investors, owners and tenants across real estate portfolios can facilitate data-sharing and ultimately a streamlined and aligned process that optimizes capital investment.

Bring teams together to align goals, establish priorities and combine project management for efficiency using a single, centralized portfolio management system. Identify risks, opportunities and savings with a central view and realize material outcomes more quickly with Ansarada’s asset management lifecycle tools. 

Frequently asked questions

What are the five pillars of decarbonization?

Energy efficiency, clean or renewable power, electrification, clean fuel selection, and carbon capture are the five pillars of decarbonization. These work individually and together to reduce greenhouse gas emissions.

What is the difference between net zero and carbon-neutral real estate?

A real estate asset or portfolio reaches net zero when the amount of greenhouse gas it produces through operation and embodied carbon emissions is no more than the amount it removes.

Carbon neutrality is where a real estate asset or portfolio commits to not increasing carbon emissions and offsets the carbon it already emits. This strategy does not address the carbon produced by the asset or portfolio but relies on offsetting through the purchase of credits.

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