Álvarez was born in Montevideo, Uruguay. In 2009, Álvarez released his short film Ataque de Pánico! on YouTube. Before premiering online, the film screened on October 31, 2009, at the Buenos Aires Rojo Sangre film festival. A few weeks later, Álvarez made a deal with Ghost House Pictures to direct a $30–$40 million sci-fi film. His first project with Ghost House ended up being the direction and co-writing of the Evil Dead remake. After the release of Evil Dead, Álvarez stated that he had "had the temptation to do big franchises", but instead directed and co-wrote the relatively low budget horror film Don't Breathe (2016), which received positive reviews. Álvarez later revealed that during this period he was approached by Marvel Studios to direct an unspecified movie but he declined feeling he would have little creative control over it. In 2017, Alvarez teamed up with Good Universe to set up their own production company Bad Hombre.

Álvarez directed The Girl in the Spider's Web, a reboot of the English-language The Girl with the Dragon Tattoo series, based on the novel of the same name. The film featured an entirely new cast compared to the 2011 film, and was released on November 9, 2018. In April 2019, Álvarez, alongside Doug Liman, directed reshoots for the 2021 film Chaos Walking, which added an additional $15 million to the film's budget.

In 2021, Álvarez directed all nine episodes of Calls for Apple TV+, a primarily audio-based series with animated visual components. He also co-wrote and co-produced Don't Breathe 2, which was released on August 13, 2021, directed by Rodo Sayagues. In March 2022, it was announced that Álvarez would be writing and directing Alien: Romulus after pitching his own story, and was said to be "unconnected" to the previous films in the franchise, for a theatrical release in August 2024.