A Sector in Transition

The US office real estate market is at a pivotal juncture. After years of uncertainty driven by the COVID-19 pandemic and hybrid work trends, 2024 delivered a total return of 21.5% for US office REITs, making it the fourth-best performing REIT sector.^[1]

However, challenges remain. Elevated interest rates and high costs of capital have weighed on valuations, leaving many office REITs trading below their book value.^[2] Yet, high-quality, amenity-rich properties in prime locations have outperformed, maintaining higher occupancy rates (86.3% for REITs vs. 81.5% in private markets).^[1]

With return-to-office mandates gaining momentum and interest rate cuts announced by the Federal Reserve on September 17 (with two more to follow later this year), the sector is poised for a transformation. This creates fertile ground for strategic mergers and acquisitions, particularly as office-to-residential conversions and sustainability initiatives gain traction, strategic M&A offers new avenues for value creation.

Navigating the Office REIT Landscape in 2025

The financial metrics of the top 20 office REITs by market capitalization reveal a sector at a crossroads. With 75% of the group carrying debt-to-equity ratios above 100%—the highest reaching a staggering 264%—leverage remains a significant challenge. This underscores the importance of disciplined capital management and the need for strategic refinancing as interest rates begin to decline. Meanwhile, 50% of the REITs trading at a price-to-book value below 1 highlight potential undervaluation, offering opportunities for value investors and strategic buyers to acquire assets at a discount.^[2]

Despite these challenges, the sector has delivered a 4% average year-to-date return, signaling resilience and investor confidence in the long-term recovery of office real estate. The flight to quality, return-to-office mandates, and tight supply of new construction are driving demand for high-quality, amenity-rich office spaces, creating a favorable environment for well-positioned REITs.

For investors, strategic buyers, and private equity firms, the current landscape presents a dual opportunity: capitalize on undervalued assets while navigating the risks of high leverage. By leveraging expertise in M&A, operational improvements, and portfolio optimization, stakeholders can unlock value and position themselves for success in this evolving market. The office REIT sector is not without its challenges, but for those with a strategic vision, it offers significant potential for growth and transformation.

Challenges and Opportunities

Office REITs face a dual reality. On one hand, high leverage and undervalued assets have created financial strain for some players. On the other, a flight to quality is driving demand for Class A office spaces with modern amenities, particularly in vibrant, mixed-use districts.

According to Cushman & Wakefield, Class A office absorption has been positive in over half of US markets, with markets like Midtown Manhattan and San Jose leading the recovery.^[3]

The supply side is also stabilizing. New office construction has slowed significantly, with 2025 deliveries expected to hit a 13-year low of 13 million square feet.^[4] Tightening supply, along with rising return-to-office mandates, is setting the stage for higher occupancy rates and improved valuations.

Emerging Trends Shaping the Sector

Return-to-Office Momentum

Office attendance is stabilizing, and corporate occupiers are increasingly confident in long-term leasing decisions. A CBRE survey found that over one-third of occupiers plan to expand their office portfolios in the next two years.^[5]

Flight to Quality

Tenants are prioritizing high-quality, amenity-rich spaces in prime locations. This trend is widening the gap between Class A and lower-tier office assets, with Class A vacancy rates expected to decline further in 2025. ^[4] 

Redevelopment Potential

Underperforming office assets are increasingly being targeted for conversion to residential or mixed-use developments. This trend is supported by state and local government incentives, making it a viable strategy for unlocking value in distressed assets.^[6]

Lower Cost of Capital

With interest rates expected to decline, the cost of capital for REITs will decrease, enabling strategic acquisitions and portfolio optimization. This shift is likely to spur a wave of M&A activity as buyers seek to capitalize on undervalued assets.

Strategic Opportunities

Buy-Side M&A Opportunities

• Value Investing: Acquiring REITs trading below book value offers the potential for significant upside as valuations recover.
• Portfolio Diversification: Targeting REITs with exposure to high-growth markets like Austin, Nashville, and Miami can enhance portfolio performance.

Sell-Side M&A Strategies

• Asset Dispositions: Divesting noncore or underperforming assets can free up capital for reinvestment in high-performing properties.
• Narrative Building: Highlighting redevelopment potential and tenant quality can attract a broader pool of buyers.

Redevelopment and Conversion

Investors can unlock value by converting obsolete office spaces into residential or mixed-use developments. This strategy not only addresses housing shortages but also revitalizes urban cores.

How Alvarez & Marsal Can Help REITs and Investors

At Alvarez & Marsal (A&M), we specialize in navigating the complexities of real estate M&A. Our integrated approach combines financial, operational, and strategic expertise to deliver value at every stage of the transaction lifecycle.

• Integrated Due Diligence: Comprehensive analysis of financials, operations, and market conditions to identify risks and opportunities.
• Value Creation: Strategies to enhance asset performance, including redevelopment planning and tenant optimization.
• Tax Optimization: Structuring transactions to maximize tax efficiency and shareholder returns.
• Portfolio Analysis: Identifying underperforming assets and recommending strategies for divestment or repositioning.
• Operational Synergies: Post-merger integration to realize cost savings and operational efficiencies.
• Working Capital Management: Optimizing cash flow, reducing liquidity constraints, and enhancing debt management through rapid diagnostics and operational improvements.
• SPA Support: Ensuring favorable terms, minimized risks, and protection of financial interests throughout transactions.
• Valuation: Delivering accurate portfolio valuations, redevelopment feasibility analyses, and market benchmarking to align asset values with market trends and investor expectations.

Practical Takeaways

For Asset Managers:

• Focus on acquiring high-quality assets in prime locations to capitalize on the flight-to-quality trend.
• Leverage redevelopment opportunities to unlock value in distressed assets.

For Strategic Buyers:

• Act swiftly to acquire undervalued REITs as interest rates decline and valuations improve.
• Prioritize assets with strong tenant demand and long-term lease commitments.

For Private Equity Firms:

• Develop a clear value creation plan for distressed assets, including operational improvements and redevelopment strategies.
• Use innovative financing structures to optimize returns in a lower-cost capital environment.

Drive Growth in the Evolving Office REIT Landscape

The office REIT sector is entering a new phase of growth and transformation. For asset managers, strategic buyers, and private equity firms, the time to act is now. By leveraging the expertise of A&M, you can navigate the complexities of this dynamic market and unlock the full potential of your investments.

Let’s shape the future of office real estate together.

[1] Edward Pierzak, “Office REITs: High Quality Properties Attract & Retain Tenants, Outpace Peers,” Nareit, January 8, 2025 (accessed September 15, 2025).

[2] A&M Analysis/S&P Capital IQ (accessed September 9, 2025).

[3] “U.S. Office MarketBeat Reports: 2025 Q2,” Cushman & Wakefield (accessed September 9, 2025).

[4] “2025 U.S. Real Estate Market Outlook Midyear Review,” CBRE, July 30, 2025 (accessed September 9. 2025). 

[5] “2024 Americas Office Occupier Sentiment Survey,” CBRE, August 13, 2024 (accessed September 9, 2025).

[6] “Office Conversions: A Second Chance for Underutilized Space,” CBRE, December 2, 2022, (accessed September 9, 2025).