The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part I, Item 1 of this report on Form 10-Q. This discussion may contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to vary from those projected, including but not limited to, expectations regarding our 2009 performance which are based on certain assumptions. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements that speak only as of the date of the document. These forward-looking statements are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "expects," "projects," "believes," "plans," "anticipates" and similar expressions are intended to identify forward-looking statements. Investors are cautioned that these forward-looking statements involve risks and uncertainty that could cause actual results to differ from estimates or projections contained in these forward-looking statements, including without limitation the following:

• changes in the economic climate in the markets in which we own and manage properties, including interest rates, our ability to consummate the sale of properties pursuant to our current plan, the overall level of economic activity, the availability of consumer credit and mortgage financing, unemployment rates and other factors;
• our ability to refinance debt on favorable terms at maturity;
• our ability to defease or prepay debt pursuant to our current plan;
• risks of a lessening of demand for the multifamily units that we own or manage;
• competition from other available multifamily units and changes in market rental rates;
• increases in property and liability insurance costs;
• unanticipated increases in real estate taxes and other operating expenses;
• weather conditions that adversely affect operating expenses;
• expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs and real estate tax valuation reassessments or millage rate increases;
• our inability to control operating expenses or achieve increases in revenue;
• the results of litigation filed or to be filed against us;
• changes in tax legislation;
• risks of personal injury claims and property damage related to mold claims because of diminished insurance coverage;
• catastrophic property damage losses that are not covered by our insurance;
• our ability to acquire properties at prices consistent with our investment criteria;
• risks associated with property acquisitions such as environmental liabilities, among others;
• changes in or termination of contracts relating to third party management and advisory business; and
• risks related to the perception of residents and prospective residents as to the attractiveness, convenience and safety of our properties or the neighborhoods in which they are located.

Overview.

We are engaged primarily in the ownership and operation of multifamily residential units. We also provide asset and property management services to third party owners of multifamily residential units. Our primary source of cash and revenue from operations is rents from the leasing of owned apartment units, which represented 98.2% of our consolidated revenue for the nine months ended September 30, 2009.

The operating performance of our properties is affected by general economic trends including, but not limited to, factors such as household formation, job growth, unemployment rates, population growth, immigration, the supply of new multifamily rental communities and the supply of other housing alternatives, such as condominiums, single and multifamily rental homes and owner occupied single and multifamily homes. Additionally, our performance may be affected by access to, and the cost of capital.

Rental revenue collections are a combination of rental rates, occupancy levels and rent concessions. We attempt to adjust these factors to adapt to changing market conditions, thus allowing us to maximize rental income. Indicators that we use in measuring these factors include physical occupancy and net collected rent per unit. These indicators are more fully described in the Results of Operations comparison. Additionally, we consider property Net Operating Income ("NOI") to be an important indicator of our overall performance. Property NOI (property operating revenue less property operating and maintenance expenses) is a measure of the profitability of our properties and has the largest impact on our financial condition and operating results.

Updated 2009 Expectations.

• Portfolio performance - Our guidance reflects Same Community property NOI decreasing in the range of -3.5% to -2.5% in 2009.
• Property acquisitions, sales and development - Our updated guidance reflects no property acquisitions, rather than the $80.0 million we originally anticipated. We completed the disposition of two properties for $33.9 million through September 30, 2009, and we expect no further property sales during 2009. We also began construction of a 60-unit expansion of our River Forest apartment community, which is located in the Richmond, Virginia metropolitan area. The cost of this expansion project is expected to be approximately $7.0 million. We expect to incur approximately $5.0 million in costs related to this development during 2009, with the remaining $2.0 million to be expended in 2010.
• Debt repayment - We have already repaid all our loans maturing in 2009.

Forecast Qualification. The uncertainties caused by the current economic turndown and the unprecedented financial crisis complicate our ability to forecast future performance and disposition/acquisition activity. We believe that the apartment industry is better situated to weather the recession and financial crisis than other real estate sectors, because people will normally choose shelter over discretionary spending such as going to the mall or hotel stays and because government sponsored agencies such as Fannie Mae and Freddie Mac continue to provide needed financing and refinancing credit facilities, which are otherwise unavailable to other commercial real estate sectors.

LIQUIDITY AND CAPITAL RESOURCES

       Cash Flows and Liquidity.  Significant sources and uses of cash during
the nine months ended September 30, 2009 and 2008 are summarized as follows:

                                                                      Nine Months Ended
                                                                        September 30,
(In thousands)                                                         2009        2008
Net cash provided by operations                                      $ 22,877    $ 18,212
Fixed assets:
Property/land acquisitions and development expenditures, net           (1,939)    (34,484)
Net property disposition proceeds                                      32,714      88,348
Recurring, revenue enhancing and non-recurring capital expenditures    (9,305)     (8,436)
Debt:
Decrease in mortgage notes                                            (21,832)    (44,963)
Decrease in revolving credit facility borrowings                       (9,500)     (5,500)
Cash dividends and operating partnership distributions paid           (11,641)    (11,948)

Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on our unsecured revolving credit facility (the "revolver") and proceeds from property sales. We believe that we are well positioned to weather the recent turmoil in the financial markets. Four mortgage loans totaling approximately $72.2 million were scheduled to mature in 2009. During the first half of 2009, we repaid $52.5 million of the maturing debt with funds from new mortgage loans that mature in 2016 and we utilized short term funding from our revolver for the remaining $19.7 million. The revolver borrowing was repaid with funds received from the sale of a 468-unit property located in Pennsylvania in June 2009. As of September 30, 2009, our revolver had $138.0 million available for borrowing and matures on March 11, 2011.

While we expect rental revenue to remain flat or decline due to increased concessions in some of our markets, we anticipate that cash flow provided by operations for the remainder of the year should remain consistent with current levels and should be adequate to fund our cash needs, other than the $5.0 million that we anticipate spending in 2009 to develop a 60-unit expansion of a Richmond, Virginia property, which we intend to fund with borrowings on our revolver.

Cash flow provided by operations increased during 2009 compared to 2008 primarily due to changes in accounts payable and accrued expenses, which was primarily a result of the payment of liabilities in 2008 related to funds held for managed properties and our exit from the affordable housing management business.

In addition to the development costs of $5.0 million, we anticipate funding approximately $3.4 million for recurring, revenue enhancing and nonrecurring capital expenditures for the remainder of 2009. These expenditures are expected to be funded largely from cash flow provided by operations.

Any future multifamily property acquisitions or developments would be financed with the most appropriate sources of capital, which may include secured or unsecured debt financings, borrowings on the revolver, the assumption of mortgage indebtedness, bank and other institutional borrowings, the exchange of properties, undistributed earnings and debt or equity issuances under our effective shelf registration.

We anticipate that we will meet our 2009 liquidity requirements through cash flow provided by operations. We believe that this and other sources, such as the revolver, should be sufficient to meet operating requirements, capital additions, mortgage amortization payments and the payment of dividends in accordance with REIT requirements. We anticipate that we will continue paying our regular quarterly dividends in cash.

RESULTS OF OPERATIONS

Comparison of the three and nine months ended September 30, 2009 to the three and nine months ended September 30, 2008.

Our Same Community portfolio represents properties that we have owned for all of the comparison periods. For the three month comparison period ended September 30, 2009 and 2008, the Same Community portfolio consisted of all 48 owned properties containing 12,108 units. For the nine month comparison period ended September 30, 2009 and 2008, the Same Community portfolio consisted of 46 properties containing 11,572 units, and Acquired properties represents two properties acquired in April 2008.

The net loss from continuing operations decreased $555,000 and $2.1 million during the three and nine month comparison periods, respectively. The decrease in the three month comparison period was primarily due to a reduction in depreciation and amortization expense. The decrease in the nine month comparison period was primarily due to a reduction in interest expense and the gain on insurance recoveries.

NOI for the Same Community portfolio decreased during both the three and nine month comparison periods. The decrease in both comparison periods was primarily attributable to reductions in property revenue at our Southeast properties resulting from increases in rent concessions and vacancy losses.

The following table presents property NOI results:

                                  Three Months Ended September 30,               Nine Months Ended September 30,
                                2009                 2008                      2009               2008
                              Property             Property    Increase/     Property           Property    Increase/
(In thousands)                   NOI                 NOI      (Decrease)        NOI               NOI      (Decrease)
Same Community Properties:
Midwest                      $    10,506           $ 10,256    $     250    $    31,221         $ 30,215    $   1,006
Mid-Atlantic                       3,462              3,427           35          7,191            7,069          122
Southeast                          4,288              4,981         (693)        12,927           15,289       (2,362)
Total Same Community              18,256             18,664         (408)        51,339           52,573       (1,234)
Acquired Properties                    -                  -            -          3,312            2,105        1,207
Total Property NOI           $    18,256           $ 18,664    $    (408)   $    54,651         $ 54,678    $     (27)

NOI is determined by deducting property operating and maintenance expenses from property revenue (excluding amounts classified as discontinued operations) for our properties and deducting direct property management and service company expenses and construction and other services expenses from management and service company revenue for the management and service operations. We consider NOI to be an appropriate supplemental measure of our performance because it reflects the operating performance of our real estate portfolio and management and service companies at the property and management and service company level and is used to assess regional property level performance. NOI should not be considered (i) as an alternative to net income (determined in accordance with GAAP), (ii) as an indicator of financial performance, (iii) as an alternative to cash flow from operating activities (determined in accordance with GAAP) or (iv) as a measure of liquidity; nor is it necessarily indicative of sufficient cash flow to fund all of our needs. Other real estate companies may define NOI in a different manner.

A reconciliation of NOI to total consolidated net (loss) income attributable to AERC is as follows:

                                                                Three Months Ended      Nine Months Ended
                                                                  September 30,           September 30,
(In thousands)                                                   2009        2008        2009        2008

Property NOI                                                   $ 18,256    $ 18,664    $ 54,651    $ 54,678
Service company NOI                                                  22           8         139         165
Construction and other services NOI                                 (86)        (31)       (269)       (226)
Depreciation and amortization                                    (8,502)     (9,304)    (26,297)    (26,726)
General and administrative expense                               (3,831)     (3,668)    (10,136)    (10,379)
Interest income                                                       6          16          41         122
Interest expense                                                 (8,665)     (9,012)    (25,586)    (26,624)
Gain on insurance recoveries                                          -           -         544           -
Equity in net loss of joint ventures                                  -         (28)          -         (72)
Income from discontinued operations:
Operating income (loss)                                               -         325         568        (678)
Gain on disposition of properties                                    (2)          -      15,411      45,203
Income from discontinued operations                                  (2)        325      15,979      44,525
Net (loss) income                                                (2,802)     (3,030)      9,066      35,463
Net income attributable to noncontrolling redeemable interest       (14)        (13)        (40)        (40)
Consolidated net (loss) income attributable to AERC            $ (2,816)   $ (3,043)   $  9,026    $ 35,423

The following chart reflects the amount and percentage change in line items that are relevant to the changes in overall operating performance:

                                              Increase (decrease) when     Increase (decrease) when
                                             comparing the three months    comparing the nine months
                                              ended September 30, 2009     ended September 30, 2009
(In thousands)                                 to September 30, 2008         to September 30, 2008

Property revenue                             $       (822)        (2.5)%   $       750           0.8%
Property operating and maintenance expense           (414)        (2.9)%           777           1.9%
Depreciation and amortization                        (802)        (8.6)%          (429)        (1.6)%
Interest expense                                     (347)        (3.9)%        (1,038)        (3.9)%
Gain on insurance recoveries                            -            N/A           544            N/A
Income from discontinued operations                  (327)      (100.6)%       (28,546)       (64.1)%

Property revenue. Property revenue is impacted by a combination of rental rates, rent concessions and occupancy levels, i.e., net collected rent per unit. Physical occupancy at the end of each period and net collected rent per unit are presented in the following tables:

                                           Physical Occupancy
                               Three Months Ended        Nine Months Ended
                                 September 30,             September 30,
                              2009             2008     2009            2008
Same Community Properties:
Midwest                       96.0%            97.0%    96.0%           97.0%
Mid-Atlantic                  94.0%            96.3%    95.3%           95.3%
Southeast                     91.3%            92.3%    91.3%           92.3%
Total Same Community          94.6%            95.8%    94.7%           95.6%
Acquired Properties            N/A              N/A     91.8%           98.1%




                                   Average Monthly Net Collected Rent Per Unit
                                    Three Months Ended             Nine Months Ended
                                       September 30,                 September 30,
                                2009                    2008        2009       2008
Same Community Properties:
Midwest                      $       790               $   792    $    785    $   775
Mid-Atlantic                 $     1,165               $ 1,169    $  1,260    $ 1,240
Southeast                    $       880               $   947    $    876    $   946
Total Same Community         $       858               $   876    $    847    $   856
Acquired Properties                   N/A                   N/A   $    988    $ 1,014

The following table presents property revenue results:

                                  Three Months Ended September 30,                Nine Months Ended September 30,
                                2009                 2008                       2009                 2008
                              Property             Property    Increase/      Property             Property    Increase/
(In thousands)                 Revenue             Revenue    (Decrease)      Revenue              Revenue    (Decrease)
Same Community Properties:
Midwest                      $    18,860           $ 18,910    $     (50)   $     56,181           $ 55,463    $     718
Mid-Atlantic                       5,288              5,412         (124)         10,838             10,604          234
Southeast                          8,107              8,755         (648)         24,196             26,197       (2,001)
Total Same Community              32,255             33,077         (822)         91,215             92,264       (1,049)
Acquired Properties                    -                  -            -           5,002              3,203        1,799
Total Property Revenue       $    32,255           $ 33,077    $    (822)   $     96,217           $ 95,467    $     750

The slight decrease in property revenue for the Midwest portfolio during the three month comparison period is primarily due to an increase in vacancy losses, while net rents remained constant. The increase in property revenue for the Midwest portfolio during the nine month comparison period is primarily a result of an increase in net rents while vacancy losses remained consistent. Property revenue in the Mid-Atlantic properties increased during the nine month comparison period primarily due to net rent increases which were partially offset by an increase in the amount of vacancy losses; however, during the three month comparison period vacancy losses were greater than net rent increases resulting in a reduction in property revenue. Property revenue for the Southeast portfolio decreased during 2009 in both comparison periods primarily due to reductions in net rent and increases in the amount of vacancy losses.

Property operating and maintenance expenses. Property operating and maintenance expenses decreased in 2009 during the three month comparison period primarily as a result of reductions in repairs and maintenance expenses. Property operating and maintenance expenses increased in 2009 for the nine comparison period primarily as a result of increases in personnel and utilities expenses related to the properties acquired in 2008.

Depreciation and amortization. Depreciation and amortization expense decreased during both comparison periods primarily due to a decrease in amortization of intangible assets in 2009 related to properties acquired in 2008 that are now fully amortized.

Interest expense. Interest expense decreased in 2009 during the nine month comparison period primarily due to the receipt in the first quarter of 2009 of refunds totaling $563,000 in defeasance costs in connection with certain previously defeased loans and decreased interest expense of $200,000 for borrowings on our revolver.

Income from Discontinued Operations. Discontinued operations include the operating results and gains related to the sales of two properties sold in 2009 and 15 properties that were sold during 2008. Defeasance/prepayment costs recognized in 2008 totaling $2.0 million were included in discontinued operations. For further details on "Income from discontinued operations," see Note 2 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.

CONTINGENCIES

For a discussion of contingencies, see Note 9 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.