Centuria Office REIT (ASX:COF) needs to balance resolving its elevated balance gearing sheet position with earnings dilution that may come with asset sales at a depressed point in the cycle, Jarden said in a note on Wednesday.

It "has erred on the side of delaying difficult decisions" around the payout ratio and asset sales, leading to value erosion over time. Net tangible assets are down 33%, and funds from operations have fallen 44% since 2021.

Underlying demand for suburban office remains subdued. While fiscal 2027 expiry is at 4.7% of income, vacancy is 9% and fiscal 2028 expiry is 16.9%, which are likely to weigh on any recovery in underlying earnings.

If investors are convinced that suburban office markets are reaching an inflection point, then the real estate investment trust has operating and financial leverage to make improvements.

The REIT cites high replacement costs as supportive for the fundamentals of suburban office, but this will only be relevant in areas where leasing demand remains robust, per Jarden.

The investment firm retained an underweight rating on Centuria Office REIT and lowered the price target to AU$0.86 per share from AU$0.88 per share.