How circularity can make the built environment more sustainable

The built environment is responsible for almost 40 percent of global energy-related CO₂ emissions and produces about one-third of the world’s waste, figures that continue to rise with new waves of construction and retrofitting. Over one-quarter of global CO₂ emissions come from building operations alone. But while the concept of circularity—essentially recycle and reuse writ large—gains traction across various industries, real estate has yet to adopt these practices at scale (see sidebar “What’s circularity in the built environment?”). Only 1 percent of materials from building demolitions are reused. The rest of the concrete, steel, and other valuable materials become waste, even while new supplies of these same materials are generated for use in other buildings. Circular principles could abate 13 percent of the built environment’s embodied carbon emissions in 2030 and nearly 75 percent in 2050.

The built environment encompasses one of the largest global industries, with a total value of $14 trillion (13 percent of global GDP), of which real estate composes almost $4 trillion. It accounts for 12 percent of global employment. The sector is experiencing substantial volume growth driven by rapid urbanization, setting global construction on a path to $22 trillion in total value by 2040. But as a whole, the built environment generates more global emissions than any other sector, a problem at the heart of one of the world’s most crucial industries that demands solutions.

As the value of the global green built environment approaches $2 trillion, there’s a growing opportunity to disrupt the allocation and flow of building resources with circularity. A shift toward circularity could benefit a range of stakeholders—including asset owners, contractors, designers, end users, engineers, and material manufacturers—by improving construction efficiency, lowering embodied carbon, mitigating climate risks, and reducing risks by localizing supply chains.

Circularity can be part of the answer and, at the same time, improve the built environment’s economics. By recirculating used materials through harvesting, recertifying, and testing, construction projects can be delivered at a lower cost than by using virgin materials with equivalent performance criteria. Circular practices can accelerate project timelines by minimizing the total work required for an equivalent outcome, mitigating labor productivity challenges by reducing the impact of resource and manufacturing lead times.

Localizing material sourcing can further strengthen supply chain resilience by reducing reliance on cross-border flows. Moreover, circularity supports sustainability efforts and regulatory compliance by lowering embodied carbon through reduced virgin-material extraction, decreasing costs associated with carbon pricing and carbon offsets. Recent increases in cross-border tariffs add to the incentive to create more resilience in supply chains for building materials.

This article explores the benefits of and obstacles to circularity and suggests actions for industry leaders. The data and estimates (referred to as “our estimates”) presented throughout this article are derived from McKinsey’s collaboration with the World Economic Forum on circularity in the built environment.

Circularity: Economic and environmental benefits, as well as obstacles

When assessing the case for circularity, stakeholders can take a holistic view, examining the benefits of and the obstacles to an industry paradigm shift. They will also need to balance embodied carbon benefits with operational carbon trade-offs, as well as the costs and benefits of building new versus reutilizing.

Using the circular approach yields several primary benefits:

• Economic and social benefits. Circular approaches in the built environment can lower costs and reduce asset downtime by localizing supply chains, reusing existing structures, and salvaging materials. The embodied carbon in new or existing buildings can be reduced, lowering carbon-offset commitments. Additionally, circularity can create local job opportunities in asset maintenance, on-site material recovery and sorting, and refurbishment. Broad global adoption of circularity in the sector could create 45 million waste management jobs by 2030, stimulating local economies.
• More resilience and flexibility. Resource recirculation and utilization enhance the resilience of buildings by making them adaptable to future needs. Designing for disassembly and modularity ensures that buildings can be easily updated, modified, or repurposed, extending their lifespans and reducing the need for new construction. Flexibility is particularly valuable in urban areas, where space is limited and many buildings have cultural and historical value.
• Less environmental impact. New construction often requires demolishing existing structures, leading to mixed-material waste. While this waste is often simply discarded, there’s substantial potential for stakeholders pursuing circular strategies to invest the capital and time required to sort it. With advanced planning and careful demolition processes, components from a building envelope (such as aluminum and glass) can be individually removed, simplifying the sorting process and reducing the environmental impact of demolition.
• Regulatory and market incentives. Regulatory mechanisms (such as carbon-pricing schemes, decarbonization subsidies, and tax exemptions) can support circularity’s economic viability. For example, the European Union has considered a separate emissions-trading system for buildings and road transport in 2027 that could bolster the business case for circular approaches. Economies of scale and technological advancements can lower the costs of reuse and recycling, and rising landfill costs can create more financial incentives for circularity.

The following are the primary obstacles to circularity in the built environment:

• Value chain rewiring. Integrating circular principles requires a fundamental shift—one that recognizes long-term cost efficiencies, risk mitigation, and value creation beyond short-term gains. The transformation involves a complete rewiring of the value chain because closing the material loop disrupts traditional material flows and creates new business opportunities. The traditional, linear value chain is highly commoditized and fragmented, which makes cohesive circular decision-making challenging.
• Need for clear business cases. Business cases for circularity in the built environment are emerging but not yet widespread, making end-to-end thinking difficult. Currently, stakeholders aren’t fully incentivized to embrace circularity, but individual players risk falling behind if others move first, particularly if those players are customers that pivot away from noncircular products or services.
• Geopolitical landscape. The evolving geopolitical landscape has considerable influence on the stability of material availability, regulatory frameworks, and supply chains. Circular strategies can enhance resilience by reducing dependence on volatile resources and fostering more localized, self-sustaining ecosystems.
• Technology and data. Successful implementation of circularity requires greater data transparency and tracking of material provenance than traditional models. Such elements may not be readily available or affordable for all companies and aren’t currently rolled out at scale. Additionally, separating, processing, and recycling mixed-material products remains a challenge.
• Stakeholder engagement. The adoption of circular practices requires alignment and collaboration across the entire value chain. Stakeholders—including architects and designers, contractors, distributors, end users, materials manufacturers, operators, and owners and investors—must work together and embrace circular principles to ensure a cohesive and effective transition.

New buildings: Material recirculation at the center

Substituting virgin materials with recycled construction and demolition waste is crucial to circularity in the built environment. To effectively scale this new approach, stakeholders can consider region-specific strategies, such as sourcing from local existing building stock, pursuing new methods of production that rely on recycled materials, and designing to accommodate repurposed materials.

The following is a list of major building materials and our estimates of how much circular approaches for each can contribute to carbon abatement and net value gain:

• Concrete and cement. Concrete and cement contribute 30 percent of building-material-related CO₂ emissions. Circular strategies such as enhanced recarbonation and the mineralization of aggregates from concrete waste or other waste materials can abate 96 percent of embodied CO₂ emissions from cement by 2050.

  Recent developments in reusing cast-in-place concrete include strengthening existing concrete structures on-site using carbon plating and repurposing reinforced concrete slabs that have already been cut to size. These approaches help extend the life of concrete structures and reduce waste by using materials that would otherwise be discarded, resulting in an up to 80 percent reduction of up-front greenhouse gas emissions. Additionally, industrial by-products such as fly ash, pozzolans, and slag can be reused as cementitious materials, helping to reduce carbon emissions and create new revenue streams.

  We estimate the net value gain from circularity in cement and concrete at $10 billion in 2030 and $122 billion in 2050.

• Construction steel. Steel is already highly recyclable: It can be melted down and reused multiple times without losing its integrity. In fact, nearly 25 percent of metal ores were recycled in 2023, compared with only 3 percent of fossil-fuel materials, such as coal, natural gas, and oil. Reusing or repurposing whole construction steel components is currently only done at a small scale but could be expanded. Transitioning to using electric-arc furnace steel production and more scrap collection can avoid up to 60 percent of total CO₂ emissions from steel by 2050; some companies are already successfully using both of these strategies. We estimate the net value gain from circularity in steel at $27 billion in 2030 and $61 billion in 2050.
• Construction aluminum. Adopting alternative fuels in the manufacturing process, designing for reuse, and increasing recycled-material use can reduce aluminum-related CO₂ emissions by up to 89 percent by 2050. We estimate the net value gain from circularity at $16 billion to $31 billion in 2030 and $20 billion to $42 billion in 2050.
• Construction plastics. Designing for reuse and modularity, increasing the supply and use of “regrind” plastics, and using alternative fuels can decrease CO₂ emissions from plastics by up to 62 percent by 2050. We estimate the net value gain from circularity at $7 billion to $20 billion in 2030 and $38 billion to $112 billion in 2050.
• Flat glass. Increasing the use of cullet (essentially, using smashed glass pieces to create new glass) and designing for reuse and modularity can abate up to 41 percent of CO₂ emissions from flat glass by 2050. We estimate the net value gain from circularity in flat glass at $3 billion in 2030 and $16 billion to $25 billion in 2050.
• Gypsum wallboards. Downcycling (converting materials into different products), recycling, and using renewable energy in the production process for gypsum wallboards can yield substantial value gains and CO₂ emission abatement of up to 31 percent by 2050. We estimate the net value gain from circularity at $1 billion in 2030 and $4 billion in 2050.

Knowing the contribution that each type of material can make to net value gain (Exhibit 1) and to CO₂ abatement (Exhibit 2) can help stakeholders target the highest priorities and examine the trade-offs.

Existing buildings: Resource utilization can reduce environmental impact and prolong value

Refurbishing, renovating, retrofitting, repurposing, and upgrading existing buildings are all examples of improving resource utilization (see sidebar “Renovating, repurposing, and retrofitting: What’s the difference?”). Energy retrofits, a dimension of resource utilization, involve improving or replacing a building’s energy systems, including appliances; external envelopes (cladding, doors, insulation, roofing, and windows); heating, ventilation, and cooling systems; and lighting.

A considerable portion of the building stock in developed countries is inefficient, making energy retrofits crucial to reducing the impact of existing buildings. In the European Union, 75 percent of the building stock, amounting to more than 220 million buildings, is rated energy inefficient. Despite this, 80 percent of the world’s existing buildings are anticipated to remain standing by 2050. Extending the life of built assets through energy retrofitting could reduce their total carbon emissions by 50 to 75 percent compared with new construction and can save up to 77 percent of costs compared with fully new buildings.

The built-environment industry is experiencing a boom in energy retrofits, with a market we expect to grow by 8 percent annually, from $500 billion today to $3.9 trillion in 2050. Assuming this scenario, we expect the energy retrofit market alone to gain substantial market share in the overall construction market, increasing to almost 25 percent, from 5 percent (Exhibit 3). This boom in energy retrofitting, while essential to reducing energy consumption, presents two challenges: the extraction of virgin materials and the generation of waste from removing and replacing materials that could still have functional life.

As the energy retrofit market grows, there are opportunities to create circular ecosystems. About 60 percent of retrofit costs come from materials by our estimates. Yet almost seven billion metric tons of waste material will be extracted from retrofits across apartments, houses, and commercial and industrial buildings by 2050. This monumental volume of material underscores the urgent need for circular strategies to maximize resource efficiency and mitigate environmental impact.

There’s an opportunity for a sizable proportion of material retrofits to be recirculated back into the value chain by either directly recirculating materials through reusing them on-site or recirculating them through an aftermarket. We estimate that 50 percent of materials removed from buildings during retrofits from 2023 to 2050 could be recirculated, corresponding to $600 billion of materials diverted from landfills in 2050.

Paving the path forward: How industry leaders can advance circularity

There’s exciting innovation across the building ecosystem that can support stakeholders as they become more circular. Many of these initiatives are just emerging but when scaled up could provide stakeholders with the ability to capture recurring value from circularity:

• Urban mining. Urban mining involves extracting and reusing valuable materials from existing assets or waste streams. Building components and materials can be harvested during deconstruction, retrofits, and upgrades. Urban mining will continue to be relevant, as anthropogenic stock will increase by 33 percent by 2040, yielding more materials to be mined. Predemolition audits, building information models, digital twins, material passports, reversible component designs, and demand-side mapping are key enablers. Various European cities have started initiatives to scale urban mining and increase the perception of buildings as “material banks.”
• Material futures trading. At the moment, mainstream valuations of buildings don’t take into account residual resale value of constituent building materials and components. Trading in building materials futures is an emerging concept. Such contracts introduce a way of valuing built assets by considering the potential future value of their materials and by creating a market for selling these materials to new users at an agreed-upon end-of-life point for the asset. These financial instruments allow sellers to capture additional asset value (such as through additional cash flows and deposits to secure the material). They also allow buyers to acquire used building materials at a preferential rate and hedge against price fluctuations and supply chain risks. Scaling requires greater awareness of building material liquidity, while professional indemnity insurance, recertification strategies, investor valuation methodologies, and design processes will need to adapt.
• Technological advancements. Digital tools and platforms can enhance the management, tracking, and utilization of materials. Technologies such as digital twins create data transparency, support material specification tracking, capture maintenance and management information, and help plan the life cycle of building materials, ensuring maximum efficiency and minimal waste. Spatial-mapping technology can provide 3D models of existing assets, giving designers important geometric and material information earlier in the project life cycle. Digital material marketplaces can consume this data for building material or product resale. Generative design algorithms can optimize new buildings, maximizing reused, secondhand building materials based on what’s available locally. Stakeholders can use these technologies, combined with at-scale material testing and recertification processes, to increase confidence in reused building material and product quality or to provide greater certainty earlier in the design or redesign phases.
• Opportunity to commercialize new circular products and offerings. McKinsey’s proprietary research indicates that the majority of decision-makers across the built environment would be willing to pay a premium for green materials, assuming these are in deficit by 2030. There are multiple ways for stakeholders to capture business value from more circular practices. For example, material and part suppliers can explore material- and performance-as-a-service models in which owners can rent building materials, products, and systems for a defined period. They can horizontally integrate by using waste as feedstock for other industries, generating supplementary revenue streams. Innovative financial models such as pay-per-use and subscription services can offer companies incentives to maintain, return, and reuse building materials and components. Logistics companies can provide reverse-logistic services for construction companies and building material manufacturers by using excess capacity on return journeys from construction sites to remove materials destined for recycling. Building material companies and contractors can also explore value-added services. For example, concrete suppliers can explore providing in situ concrete strengthening, testing, and carbon-wrap-reinforcement services to enhance existing structures so that they can carry heavier loads. This would reduce the need for new concrete structures and would lower customer costs, which could command a price premium.
• Collaborations across the value chain. Designers and engineers can collaborate to develop common data standards that make material and component reporting easier and to create industry-standard designs that improve component disassembly and interchangeability. Furthermore, real estate investors and owners can use the standards to ensure that built assets are designed for eventual disassembly, allowing for material recirculation and the potential to repurpose the asset for another use without requiring complete demolition. Introducing building material suppliers early in the procurement process will allow for deeper integration and innovation to ensure that designs can be interchangeable and disassembled.

It will be crucial for stakeholders in the built environment to focus on integration, partnerships, and standardized requirements for circular materials. We already observe this with some stakeholders across the value chain, such as collaborations between glazing and aluminum-building-material suppliers. They have shared the costs of disassembly services required for glazed aluminum facade panels, enabling each to reclaim materials to use as feedstock for new materials and products.

Conducting whole life cycle assessments and using technology that monitors material use or connects stakeholders in a marketplace will be essential to circularity’s widespread adoption in the built environment. Companies, government agencies, and research institutions can conduct comprehensive life cycle assessments to inform policy and investment decisions.

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Circularity offers a transformative approach to making the built environment more sustainable and economically resilient. By embracing circular practices, the industry can create substantial economic value, enhance resource efficiency, and drastically reduce the environmental impacts associated with the built environment.

To accelerate the circular transition, stakeholders can collaborate, leverage technology, and plan for circularity from the earliest stages of developing buildings. Integration, partnerships, and standardized circular materials, along with strong business models, are essential to support long-term sustainability. Large-scale adoption of circularity will ultimately require a sea change in mindsets, collaboration across the sector, and bold, creative thinking about new business models and possibilities by all stakeholders in the built environment. Accelerating this new future can begin immediately, with each individual step in a circular direction.

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