As the world approaches the midway point of this crucial decade for carbon emissions reduction, companies are increasingly divided on how to decarbonize their real estate.
One camp is waiting for the power grid to become greener, hoping to benefit from the growing share of renewable energy without altering their building operations. This approach seems appealing for businesses looking for a low-effort path. Many cities are making strides to enhance renewable energy integration within local grids, as municipalities strive to meet their own net-zero targets. For example, Seattle’s grid is already 80% powered by clean energy, and Paris uses fossil fuels for only 8% of its electricity. A clean energy grid is undoubtedly key to a sustainable future, and it also bolsters energy security. However, relying solely on cleaner energy does little to address the energy inefficiency that still exists in buildings, which could be costing businesses billions of dollars.
The electrification of buildings has been gaining momentum in recent years, with cities like Washington, DC, and Seattle leading the way. However, simply electrifying older buildings without addressing their energy efficiency doesn’t always equate to a reduction in emissions, especially in cities where the grid is still transitioning to cleaner energy sources. Electrification in these areas could exacerbate grid capacity issues. With growing demand, especially from energy-intensive sectors like AI data centers, laboratories, and onshore manufacturing, energy resilience and the pressure on local grids will only increase.
In contrast to the wait-and-see approach, many building owners and occupiers are taking proactive steps to reduce operational emissions. They’re combining electrification with robust energy efficiency measures, which are vital for decarbonization and achieving long-term net-zero goals. A growing number of regulations are also pushing businesses to take action, such as the Building Performance Standards (BPS) that more than 40 U.S. cities aim to implement by 2026. Similarly, in Europe, the EU has set aggressive targets to reduce energy use and emissions in buildings, including mandatory renovations for the worst-performing buildings by 2030 and 2033.
However, beyond regulatory pressure, the financial benefits are making a stronger case for action, especially in today’s market. Investments in energy efficiency directly translate into lower operational costs. Low-carbon buildings are cheaper to operate. For instance, light to medium retrofits could reduce energy consumption by 10% to 40%, depending on the property type and scope of work, leading to savings of $2.9 billion to $11.4 billion annually across 46,600 buildings in 14 markets. If full building retrofits are achieved, the savings could climb to $16.8 billion.
Energy efficiency also helps mitigate the risks associated with energy price volatility and the strain on aging grids, particularly during peak demand or extreme weather events. Sectors like data centers, laboratories, and healthcare could significantly benefit from energy-efficient retrofitting. For instance, energy improvements in these sectors can cut energy costs by $4.75 per square foot, an attractive prospect for corporate tenants aiming to meet their own carbon goals while reducing operating expenses.
The demand for energy-efficient spaces is growing, and companies are increasingly seeking buildings that help them meet their sustainability targets. Research shows that in 21 cities worldwide, 30% of the demand for low-carbon office spaces will go unmet by 2025. This demand-supply gap will widen to over 70% by 2030 unless more low-carbon buildings are developed. This trend extends beyond office spaces, creating opportunities across all asset classes. Investors who develop low-carbon buildings now stand to benefit from green premiums in rental and sale values.
Currently, green certifications are a key measure for low-carbon buildings, but as tenants and buyers focus more on carbon targets, the emphasis on energy efficiency and emissions performance will only grow.
To thrive in a low-carbon future, today’s buildings must become smarter and more efficient. While the financial, environmental, and reputational benefits are clear, the biggest challenge lies in securing the sustainable finance needed to make these transformations. The cost of retrofitting office buildings alone across 17 major countries is estimated to exceed $3 trillion. To meet this challenge, more private and public funding will be essential, extending beyond the green bonds and loan programs currently available.
The path to low-carbon buildings is clear. With the right investments, both in energy efficiency and electrification, businesses can reduce costs, meet sustainability goals, and be well-positioned in an increasingly carbon-conscious world.
