Objective: With the growing elderly population in urban communities and the physical and psychological consequences of aging, there is an increasing need to enhance the quality of life for this vulnerable group. Among the factors influencing elderly well-being, the physical environment—particularly within nursing homes—plays a significant role in shaping mental health outcomes. While many studies have explored the relationship between the environment and elderly well-being, they often address isolated components and fail to provide a holistic perspective. Moreover, most research focuses on public or residential environments, overlooking the specific needs of elderly care facilities. The objective of this study is to explain and analyze the relationship between physical environmental indicators and the mental health of elderly residents in nursing homes in Shiraz, aiming to fill the gap in developing a comprehensive analytical model for such settings. Method: This research is applied in nature and follows a quantitative approach. Data collection was conducted using a structured questionnaire, completed by 60 elderly residents of nursing homes in Shiraz. To examine the relationships between the identified variables, the study utilized Structural Equation Modeling (SEM), and data analysis was performed using Smart PLS software. Results: The findings indicate that certain physical environmental factors have a significant impact on improving the mental health of elderly individuals. Specifically, the design of interactive and recreational spaces, incorporation of green areas and natural elements, the use of appropriate color schemes, high-quality lighting, and ergonomic spatial design were identified as the most influential components. These indicators contribute to enhancing feelings of safety, comfort, social engagement, and overall psychological well-being among the elderly. Conclusions: The results underscore the importance of integrating physical design considerations into the planning and development of elderly care environments. Improving these physical factors can lead to better mental health outcomes and a higher quality of life for elderly individuals residing in nursing homes. This research highlights the need for a comprehensive and user-centered approach to environmental design in aging-friendly urban and institutional settings.