M&A deals have emerged as the best path for office REITs to deliver near-value to shareholders as NAVs are likely to remain below pre-pandemic levels for the foreseeable future – but to spark that activity, NAV expectations need to be temporarily reset, according to a new analysis from BTIG Research.

Office REIT values were already discounted even prior to the pandemic, and it now costs landlords more than ever to maintain cash flow. BTIG predicts trends in FFO-to-AFFO erosion mean discounts will continue, especially as tenants transition from a period of short term renewals to longer-term commitments with higher leasing costs.  And while the firm doesn't "tend to see REIT M&A activity occur below consensus NAV," it argues that a new view of NAV discounts is warranted in the current climate.

The BTIG research points to three key headwinds preventing office REITs from trading at or above NAV in M&A deals: cash flow erosion uncertainty, the cost of such deals, and better investment options elsewhere in the CRE sector.