Spreads between traditional multifamily and senior housing can be wide, says MMI.

CALABASAS, CA—The senior housing market is firing on all cylinders for the first time in several years, Marcus & Millichap says in a research report charting the outlook for the first half of 2014. Aside from the obvious driver—an aging population—other factors underpinning performance gains include a resurgent housing market, healthy employment growth and disciplined development, MMI says.

“Fueled by low interest rates, home appreciation was primarily responsible for lifting occupancy at CCRCs during 2013, particularly in the fourth quarter,” according to the report. “Seniors able to unlock home equity are more likely to sell in the current market,” a fact that mitigates against the high costs of moving into an entrance-fee continuing care retirement community.

As for the correlation between employment growth and improving occupancy in housing that by its nature attracts retirees, MMI finds that seniors on the verge of downsizing are liquidating as their unemployed children find jobs and households “de-bundle.” That’s propelling demand for both CCRCs and independent living facilities.

Some of the impetus for increasing demand in the assisted living and skilled nursing sectors of senior housing is coming from healthcare policy at the state level. MMI’s report notes that a greater number of states are focusing on home care for skilled nursing patients, “while shifting dementia care into AL facilities to manage costs.”

Buyers’ response to changing market conditions for other property types is proving to be the proverbial rising tide for the sectors within senior housing. “Cap rate compression in other commercial real estate sectors is elevating interest in seniors housing from nontraditional investors,” according to MMI’s report.

Multifamily buyers, for example, now realize that “purchasing an IL facility and putting an operator with a proven history in place can generate healthy returns despite the elevated management fees,” the report states. “With average cap rates in the high-6% range for newer properties, the spread between market-rate multifamily and IL assets can be more than 100 basis points.” That’s an especially attractive proposition when, as MMI notes, occupancy in the IL sector increased 80 bps last year, finishing Q4 at 90.7%.

However, the firm notes that spillover demand from high-net-worth individuals has not trickled into the AL sector, on account of “the complicated nature of the business.” Instead, these investors who lack sector experience are “more apt to take lower returns and put funds into publicly traded REITs that specialize in these properties.”

Experienced operators, in the meantime, will find “opportunities with upside,” says MMI. Properties that need a capital expenditure represent “the most prevalent value-add deals on the market, and savvy buyers will target class B/C AL facilities in class A locations to reposition and add dementia care units.”

As evidence of senior housing’s appeal to investors, 2014 has already seen two big portfolio acquisitions: Interwest Capital Corp. and Angelo, Gordon & Co. in January acquired eight properties in the Destinations Living portfolio, paying $150 million for the Las Vegas-area acquisition; while earlier this week, Northstar Realty Finance bought out Safanad Ltd.‘s share of a 70-asset portfolio in a deal worth $1.05 billion. GlobeSt.com noted that it was among the last sizable portfolios of healthcare assets available for purchase.