CALABASAS, CA—All signs point to a banner year for seniors housing, Marcus & Millichap says in its latest report on the sector, which predicts "a banner year." An additional attraction for investors has been a wider spread between cap rates and interest rates on seniors properties; however, the main drivers are a combination of a strengthening economy and favorable demographic trends.

“Much of the ambiguity that faced the sector over the past few years has dissipated, though some of those factors may resurface in the years ahead,” according to the MMI report, assembled in collaboration with the firm's National Seniors Housing Group, led by VP and national director Brian Murdy. At the moment, though, “strong job growth across nearly every state is refilling local coffers and relieving pressure on state-funded reimbursements.” Also in the sector's favor are greater clarity about the implementation of the Affordable Care Act and a stabilizing residential sales market, which is giving more seniors a basis for moving into some form of seniors housing.

In terms of investor interest, MMI sees activity on a number of fronts. Assisted living facilities, not generally associated with a high level of interest from traditional multifamily buyers, have begun receiving “a wave of new capital from REITs expanding in the sector,” the firm says.

MMI projects approximately $30 billion in non-traded REIT funds entering the seniors housing market this year, with a significant share targeted at private-pay AL facilities. Furthermore, the independent living arena is benefiting as intense demand for traditional apartments spills into the sector, with buyers outnumbering sellers “by a wide margin,” according to MMI.

On the other hand, the skilled nursing sector—where MMI says occupancy has been “stuck in neutral for the past several months”—is poised for a renaissance of smaller operators this year. “Uncertainty took a toll on deal flow at the lower end of the quality spectrum the past few years, and the current bright outlook could help investors recoup lost time.”

Likely to help the SN segment is a contraction of supply coupled with a slowdown in construction. MMI's report cites the closure of obsolete facilities taking 1,800 units out of the inventory, while only 6,800 beds are under construction at 82 facilities, the lowest level since mid-2011. This is likely to support a 30-basis point increase in occupancy this year to 88.5%, while rents are expected to climb 2.1% in 2015 to $290 per bed, per day “as tight government funding limits reimbursements.”

Conversely, the pipeline is filling up for independent living facilities, with MMI predicting that new construction will add 2.4% to the existing stock. Thanks to an improving residential market enabling seniors to unlock equity in their homes, MMI says IL occupancy is expected to rise 50 bps to 92.3% by year's end, while average rents advance 3.1% to $2,923 per month.

In the continuing care retirement community segment, MMI sees another dynamic of the residential market affecting potential residents' decision-making. “A slowdown in the housing recovery could encourage some seniors who have been on the fence about releasing equity in their homes to move forward,” according to MMI's report. The sector will see the largest occupancy increase of the four main segments, rising 80 bps to  91.2%, “while entrance fees will climb at a similar pace to 2014.”

The occupancy picture is a shade less positive for assisted living, where MMI says “new construction will limit improvements in the sector this year,” keeping increases to 10 bps and a year-end average of 91.4%. The construction pipeline for AL is currently at 18,900 units, or 5.5.% of existing inventory. However, MMI says, “Strong occupancy and high rents commanded by new properties will support a 2.3% gain in average rents this year to $4,268 per month.”