Trend watch: Urban heat & cooling solutions in 2026 — signals, winners, and red flags

Opening stat hook: Extreme heat cost the United States approximately $162 billion in 2024—nearly 1% of GDP—while investment in heating and cooling building technologies surged from $280 million in 2021 to $975 million through October 2025 (Federation of American Scientists, 2025). Heat pump sales exceeded gas furnace purchases in the U.S. for the first time in 2024, signaling a fundamental market transition (IEA, 2025).

Why It Matters

Urban heat represents both a massive market opportunity and an urgent public health crisis across North America. The convergence of regulatory pressure, technological maturation, and climate-driven demand is reshaping investment landscapes in ways that will determine winners and losers for the next decade.

For investors, the signals are compelling: debt financing for heating and cooling solutions jumped to $308 million in 2024, representing 33% of total investment—a dramatic shift indicating that proven technologies have achieved bankability thresholds. Corporate venture capital participation grew from a single participant in 2021 to six by 2024, with major players like Carrier Ventures actively targeting electrification and smart grid integration.

The Inflation Reduction Act's $369 billion in clean energy incentives provides substantial policy tailwinds, while OSHA's proposed workplace heat standards (public hearings concluded July 2025) will create compliance-driven demand across commercial and industrial sectors. State-level action is accelerating, with New Jersey, New York, North Carolina, and Arizona all releasing standalone extreme heat plans in 2024-2025.

However, significant policy uncertainty exists. The National Integrated Heat Health Information System (NIHHIS) and CDC Climate & Health programs face staffing cuts, potentially affecting critical public health infrastructure like the HeatRisk and Heat & Health Tracker tools that inform adaptation planning.

Key Concepts

Heat Stress Quantification and Risk Assessment

Modern heat risk assessment integrates multiple factors beyond simple temperature readings: humidity levels, urban morphology, building stock characteristics, population vulnerability indices, and historical health outcome data. Advanced analytics now enable neighborhood-level risk stratification that informs both infrastructure investment and emergency response planning.

Cooling Technology Segmentation

The market segments into active cooling (HVAC systems, heat pumps, liquid cooling for data centers), passive cooling (radiative panels, cool coatings, reflective pavements), and nature-based solutions (urban forestry, green infrastructure). Each segment carries distinct risk-return profiles, regulatory exposure, and scaling characteristics that investors must evaluate carefully.

Supply Chain Risk Considerations

The cooling technology supply chain faces multiple pressure points: semiconductor constraints affecting smart HVAC controllers, refrigerant phase-out timelines requiring equipment redesigns, and skilled technician shortages limiting installation capacity. These bottlenecks create both risks and opportunities depending on portfolio positioning.

Sector-Specific KPI Table

Investment Segment	Primary Metric	2024 Baseline	12-Month Signal	Red Flag Threshold
Heat Pump Deployment	Annual Unit Sales Growth	+15% YoY	>20% indicates acceleration	<5% suggests demand plateau
Data Center Cooling	Liquid Cooling Penetration	25% of new builds	>40% by 2026	<30% indicates adoption lag
Smart HVAC Systems	VC Investment ($M)	$700M	Sustained >$500M annually	<$300M signals pullback
Cool Roofing	Installed Capacity (M sq ft)	120M	+15% annual growth	<8% growth warns of saturation
Urban Forestry	Federal Grant Allocations	$100M	IRA funding continuation	Program cuts signal policy reversal

What's Working

Data Center Liquid Cooling Acceleration

The explosive growth of AI workloads is driving unprecedented demand for advanced cooling solutions in data centers. North American data center cooling reached $65.5 billion in 2024, with the U.S. segment projected to grow from $25.6 billion in 2025 to $81.3 billion by 2035 at 12.2% CAGR (Precedence Research, 2025).

Major hyperscalers are leading adoption: AWS deployed proprietary in-row heat exchangers (IRHX) for GPU clusters in July 2025, Meta is scaling liquid cooling for hyperscale AI infrastructure, and Schneider Electric partnered with Nvidia in December 2024 to develop AI-ready reference cooling architectures. Castrol launched dedicated data center fluid management services in June 2025, signaling supply chain maturation.

Heat Pump Market Maturation

The U.S. heat pump market crossed a critical threshold in 2024 when sales exceeded gas furnaces for the first time. Viessmann raised $500 million in early 2024 specifically for cold-climate heat pump R&D, addressing the technology gap that previously limited adoption in northern markets. Octopus Energy secured $600 million in 2023 to scale heat pump installations across Europe, demonstrating international capital flows into the sector.

AI integration is emerging as a differentiator: 20% of new heat pumps by 2025 are expected to include AI-driven energy optimization capabilities, enabling predictive maintenance and demand response participation that enhance unit economics beyond simple efficiency gains.

State and Municipal Policy Leadership

New York's Climate Superfund Bill allocates $75 billion over 25 years for climate infrastructure including cooling centers and urban heat mitigation. Thirteen states now use Medicaid waivers for heat mitigation measures as of July 2024, creating healthcare system integration that expands addressable markets. Federal Urban & Community Forestry (UCF) programs support heat-adapted tree nurseries and micro-forest development, providing pipeline for nature-based cooling solutions.

What's Not Working

Federal Policy Uncertainty

Despite strong state-level momentum, federal heat programs face significant uncertainty. NIHHIS, the National Integrated Heat Health Information System, and CDC Climate & Health programs are experiencing staffing constraints that threaten continuity of critical tools like HeatRisk forecasting and the Heat & Health Tracker. OSHA's workplace heat rule, while generating significant industry attention through 2024-2025 public hearings, remains in proposed status with uncertain finalization timeline.

The Low-Income Home Energy Assistance Program (LIHEAP), essential for cooling bill assistance to vulnerable populations, required advocacy intervention to release funding—indicating potential future delays that could affect demand subsidization for residential cooling technologies.

Installation Capacity Bottlenecks

Skilled technician shortages constrain installation capacity across HVAC, heat pump, and advanced cooling system segments. Training pipeline development has not kept pace with demand growth, creating labor cost inflation that affects project economics. Supply chain constraints, particularly for specialized components and refrigerants, add further pressure on deployment timelines.

Equity and Access Gaps

Urban heat disproportionately affects low-income communities with less tree cover, more impervious surfaces, and older building stock. While policy frameworks acknowledge these disparities, capital deployment remains concentrated in commercial and high-end residential applications with clearer investment returns. The gap between stated equity goals and actual investment flows represents both a social challenge and a market opportunity for solutions addressing underserved segments.

Key Players

Established Leaders

Johnson Controls operates the largest installed base of building management and cooling systems in North America, with comprehensive offerings spanning commercial HVAC, smart building controls, and district cooling infrastructure. The company's recent acquisition activity, including the $8.1 billion sale of Johnson Controls-Hitachi to Bosch in July 2024, signals ongoing market consolidation.

Carrier Global Corporation provides residential and commercial HVAC solutions with increasing focus on heat pump technology and low-GWP refrigerant systems. Carrier Ventures actively invests in emerging cooling technologies and smart grid integration startups.

Trane Technologies manufactures the Trane and Thermo King brands, with strong positions in commercial building cooling and transport refrigeration. The company's sustainability commitments include science-based emissions targets driving R&D investment in efficient cooling solutions.

Schneider Electric leads in building management systems and electrical infrastructure, with December 2024 partnership with Nvidia establishing position in AI-optimized data center cooling architectures.

Emerging Startups

Asetek specializes in liquid cooling solutions for data centers and high-performance computing, with technology increasingly relevant as AI workloads drive thermal management requirements beyond air cooling capabilities.

Liquid Stack develops immersion cooling systems for data centers, enabling significantly higher heat dissipation densities than conventional approaches for GPU-intensive applications.

SkyCool Systems commercializes radiative cooling panels that achieve sub-ambient temperatures without energy input, targeting commercial building applications in hot climates.

Dandelion Energy focuses on residential geothermal heat pump installations, addressing the home retrofit market with turnkey solutions including financing and installation services.

Key Investors & Funders

Breakthrough Energy Ventures backs multiple cooling and building efficiency companies within its climate technology portfolio, providing both capital and strategic support for scaling proven technologies.

Congruent Ventures invests in sustainable infrastructure including building efficiency and cooling solutions, with portfolio companies addressing multiple segments of the value chain.

U.S. Department of Energy provides substantial grant funding through programs including the Building Technologies Office and Advanced Research Projects Agency-Energy (ARPA-E), supporting both early-stage R&D and demonstration projects.

National Renewable Energy Laboratory (NREL) launched new research initiatives in January 2025 focused on reducing data center cooling energy consumption, representing federal commitment to addressing growing AI-driven electricity demand.

Examples

AWS Proprietary Cooling for AI Infrastructure: In July 2025, Amazon Web Services deployed custom In-Row Heat Exchangers (IRHX) specifically designed for high-density GPU racks supporting AI workloads. The system integrates liquid cooling at the rack level, enabling power densities exceeding 50 kW per rack while maintaining reliability standards. This vertically integrated approach demonstrates how hyperscalers are internalizing cooling innovation rather than relying on third-party solutions, potentially limiting addressable market for pure-play cooling vendors but validating technology directions.
New York Climate Superfund Implementation: New York's $75 billion Climate Superfund, signed into law in 2024, represents the largest state-level climate investment package with significant allocations for cooling infrastructure. The program funds cooling center development in underserved communities, urban forestry expansion across all five New York City boroughs, and building retrofit programs targeting pre-1970 residential stock with minimal insulation and inefficient cooling systems. Early implementation is creating demand signals for contractors and equipment suppliers across multiple cooling technology categories.
Schneider-Nvidia AI Data Center Reference Architecture: The December 2024 partnership between Schneider Electric and Nvidia established standardized reference designs for AI-ready data center cooling. These architectures specify cooling capacity requirements, redundancy configurations, and energy efficiency targets for facilities supporting large-scale GPU deployments. The reference designs are influencing procurement specifications across the data center industry, creating a de facto standard that benefits compliant equipment suppliers while potentially disadvantaging vendors with non-conforming product lines.

Action Checklist

Map portfolio exposure to heat-related physical risks using TCFD-aligned scenario analysis frameworks
Evaluate data center holdings for cooling system adequacy given AI workload growth projections
Monitor OSHA workplace heat rule finalization timeline for compliance-driven demand timing
Assess supply chain positions of cooling technology portfolio companies, particularly refrigerant transition exposure
Track state-level heat action plan implementation for geographic demand signal identification
Review technician training pipeline investments by portfolio companies as leading indicator of installation capacity

FAQ

Q: What is the investment case for urban cooling given current policy uncertainty at the federal level? A: State-level policy momentum provides substantial demand foundation independent of federal action. New York's $75 billion Climate Superfund, California's building efficiency mandates, and similar programs across 15+ states create addressable markets exceeding federal program impacts. Additionally, corporate sustainability commitments, particularly from large real estate portfolios and data center operators, drive private-sector demand regardless of federal policy trajectories. The extreme heat cost burden ($162 billion in 2024) ensures continued investment regardless of regulatory environment.

Q: How should investors evaluate the AI-driven data center cooling opportunity? A: Focus on three vectors: technology positioning (liquid cooling capability versus air-only offerings), hyperscaler relationships (supplier status with AWS, Microsoft, Google, Meta), and geographic exposure (proximity to power infrastructure supporting data center development). The 12.2% CAGR projection through 2035 assumes continued AI investment; sensitivity analysis should consider both acceleration and deceleration scenarios. Watch for consolidation signals as hyperscalers internalize cooling innovation.

Q: What are the key red flags indicating cooling technology investments may underperform? A: Watch for: market share losses to vertically integrated hyperscalers, refrigerant transition costs exceeding projections, installation capacity constraints limiting revenue growth despite order book strength, and policy reversals affecting demand subsidization (particularly LIHEAP and IRA incentive continuation). Also monitor technician shortage persistence, which could indicate structural rather than cyclical constraints on deployment capacity.

Q: How does the shift from equity to debt financing signal market maturity? A: The increase in debt financing from minimal levels in 2021 to 33% of total investment in 2024 ($308 million) indicates that proven technologies—particularly heat pumps and smart HVAC—have achieved the predictable cash flow profiles and asset-backed characteristics that lenders require. This signals graduation from venture-stage risk to infrastructure-like return profiles, potentially compressing equity returns while expanding total addressable capital. Investors should assess whether portfolio companies can access debt markets, as those dependent on equity financing face higher cost of capital in mature segments.

Q: What emerging technologies should investors monitor for potential disruption? A: Radiative cooling panels (achieving sub-ambient temperatures without energy input), solid-state cooling (eliminating compressors and refrigerants), and AI-optimized thermal management systems represent potential disruption vectors. Monitor demonstration project results, particularly for technologies claiming step-change efficiency improvements. Be cautious about technologies requiring fundamental changes to building design or utility interconnection, as deployment timelines typically exceed projections for such solutions.

Sources

Federation of American Scientists (2025). Summer, Wrapped: The 2025 "State of the Heat"
Precedence Research (2025). Data Center Cooling Market Size to Hit USD 248.21 Billion by 2035
Net Zero Insights (2025). 2025 Investment Trends Shaping Heating and Cooling for Buildings
IEA (2025). Renewables 2025 - Renewable Heat Analysis
Spherical Insights (2025). Radiative Cooling Technology Market Strategic Overview 2024-2035
Grand View Research (2024). Energy-efficient Industrial Cooling Systems Market Report, 2030