| **UNITED STATES SECURITIES AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Washington,  D.C.  20549**                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                  |
| **Form 10-Q**                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **                     **                                                                                                                                                                                                                                                                                                |
| **[x]  QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE**                                                                                                                                                                                                                                                                                                                                                           |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                              |
| **                         **                                                                                                                                                                                                                                                                        |
| **For the  quarterly period ended September 30, 2009**                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                   |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                     |
| **[ ]  TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE**                                                                                                                                                                                                                                                                                                                                                          |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                      |
| **For the  transition period from                              to                   **                                                                                                           |
|                                                                                                                                                                                                                                                                                                                               |
| **Commission File  Number 1-12486**                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                     |
| **Associated Estates Realty  Corporation**                                                                                                                                                                                                                                                                                                                                                                                        |
| *(Exact name of registrant as specified in its  charter)*                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                       |
| **OHIO**                                                                                                                                                                                                                                                                                                                                                                                                                          |    | **34-1747603** |
| *(State or other  jurisdiction of*                                                                                                                                                                                                                                                                                                                                                                                                |    | *(I.R.S. Employer* |
| *incorporation or  organization)*                                                                                                                                                                                                                                                                                                                                                                                                 |    | *Identification  Number)* |
|                                                                                                                                                                                                                                                                                                                                                                       |    |
| **1 AEC Parkway, Richmond Hts., Ohio  44143-1467**                                                                                                                                                                                                                                                                                                                                                                           |
| *(Address of principal executive offices)*                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                          |
| **(216) 261-5000**                                                                                                                                                                                                                                                                                                                                                                                                                |
| *(Registrant's telephone number, including area code)*                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                      |
| Indicate  by check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during  the preceding 12 months (or for such shorter period that the registrant was  required to file such reports), and (2) has been subject to such filing  requirements for the past 90 days.  Yes [x]  No [ ]                                          |
|                                                                                                                                                                                                                                                                                                 |
| Indicate by check mark  whether the registrant has submitted electronically and posted on its  corporate Web site, if any, every Interactive Data File required to be  submitted and posted pursuant to Rule 405 of Regulation S-T (subsection  232.405 of this chapter) during the preceding 12 months (or for such shorter  period that the registrant was required to submit and post such files).  Yes  [ ]  No [ ] |
|                                                                                                                                                                                                                                                                                       |
| Indicate  by check mark whether the registrant is a large accelerated filer, an  accelerated filer, a non-accelerated filer, or a smaller reporting company.   See the definitions of "large accelerated filer", "accelerated  filer" and "smaller reporting company" in Rule 12b-2 of the  Exchange Act.  (Check one):                                                                   |
|                                                                                                                                                                                                                                                                                            |
| Large accelerated filer [ ]  Accelerated filer [x]   Non-accelerated filer [ ]  (Do not check if a smaller reporting company)  Smaller  reporting company [ ]                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                          |
| Indicate by check mark whether the registrant is a  shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [ ]  No [x]                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                              |
| The number of  shares outstanding as of October 26, 2009 was 16,704,871 shares.                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  |

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**ASSOCIATED ESTATESREALTY CORPORATION**

** **

**Index******

| **PART I – FINANCIAL INFORMATION** | **Page**                                                                                                                                                                                                                 |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         |                                                     | ** ** |
| ITEM 1                                  | Consolidated Financial Statements (Unaudited)                                                                                                                                                                            | ** ** |
|                                         |                                                                                                                      |   |
|                                         | Consolidated Balance  Sheets at September 30, 2009 and December 31, 2008                                                                                                                                                 | 3 |
|                                         |                                                                                                                      |  |
|                                         | Consolidated  Statements of Operations for the three and nine month                                                                                                                                                      |  |
|                                         |     periods ended September 30, 2009 and 2008                                                                                                                                                             | 4 |
|                                         |                                                                                                       |  |
|                                         | Consolidated  Statements of Cash Flows for the nine month periods                                                                                                                                                        |  |
|                                         |     ended September 30, 2009 and 2008                                                                                                                                                                     | 5 |
|                                         |                                                                                        |  |
|                                         | Notes to  Consolidated Financial Statements                                                                                                                                                                              | 6 |
|                                         |                                                                                             |  |
| ITEM 2                                  | Management's  Discussion and Analysis of Financial                                                                                                                                                                       |  |
|                                         |     Condition and Results of Operations                                                                                                                                                                   | 17 |
|                                         |                                                                         |  |
| ITEM 3                                  | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                              | 23 |
|                                         |                                                                                   |  |
| ITEM 4                                  | Controls and Procedures                                                                                                                                                                                                  | 23 |
|                                         |                                      |  |
| **PART II – OTHER INFORMATION**    |                                                                                                                                                                                                                          |
| ** **                              | **                          **                                                         |  |
| ITEM 1                                  | Legal Proceedings                                                                                                                                                                                                        | 24 |
|                                         |                                                                                   |  |
| ITEM 1A                                 | Risk Factors                                                                                                                                                                                                             | 24 |
|                                         |                                                                              |  |
| ITEM 2                                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                             | 24 |
|                                         |                                                                                             |  |
| ITEM 6                                  | Exhibits                                                                                                                                                                                                                 | 25 |
|                                         |                                                                              |  |
| **SIGNATURES**                          | 27                                                                                                                                                                                                                       |

**

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**PART 1.  FINANCIALINFORMATIONITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS**

**ASSOCIATED ESTATES REALTY CORPORATIONCONSOLIDATED BALANCE SHEETS(UNAUDITED)**

| *(In thousands, except  share amounts)*                                                  | September 30, |               | December 31,  |
|------------------------------------------------------------------------------------------|---------------|---------------|---------------|
| **ASSETS**                                                                               | 2009          |               | 2008          |
| Real estate assets                                                                       |               |               |               |
| Land                                                                                     |  $       | 107,815  |               |  $ | 110,220  |
| Buildings  and improvements                                                              | 795,178  |               | 812,443  |
| Furniture  and fixtures                                                                  | 29,279   |               | 29,315   |
|                                                                                          | 932,272  |               | 951,978  |
| Less:   accumulated depreciation                                                    | (294,293)     |               | (280,541)     |
|                                                                                          | 637,979  |               | 671,437  |
| Construction  in progress                                                                | 3,158    |               | 745      |
| Real  estate associated with property held for sale, net                                 | -        |               | 1,666    |
| Real  estate, net                                                                        | 641,137  |               | 673,848  |
| Cash and cash equivalents                                                                | 4,061    |               | 3,551    |
| Restricted cash                                                                          | 7,530    |               | 6,873    |
| Accounts and notes  receivable, net                                                      |               |               |               |
| Rents                                                                                    | 1,138    |               | 1,320    |
| Affiliates                                                                               | 308      |               | 606      |
| Other                                                                                    | 1,631    |               | 1,842    |
| Goodwill                                                                                 | 1,725    |               | 1,725    |
| Other assets, net                                                                        | 10,325   |               | 10,131   |
| **Total assets**                                                                         |  $       | 667,855  |               |  $ | 699,896  |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                 |               |               |               |
| Mortgage notes payable                                                                   |  $       | 488,369  |               |  $ | 510,201  |
| Unsecured revolving credit  facility                                                     | 12,000   |               | 21,500   |
| Unsecured debt                                                                           | 25,780   |               | 25,780   |
| Total  debt                                                                              | 526,149  |               | 557,481  |
| Accounts payable, accrued  expenses and other liabilities                                | 26,858   |               | 26,217   |
| Dividends payable                                                                        | 2,995    |               | 2,920    |
| Resident security deposits                                                               | 3,010    |               | 3,360    |
| Accrued interest                                                                         | 2,248    |               | 2,468    |
| **Total liabilities**                                                                    | 561,260  |               | 592,446  |
| Noncontrolling redeemable  interest                                                      | 1,829    |               | 1,829    |
| Shareholders' equity                                                                     |               |               |               |
| Preferred  shares, without par value; 9,000,000 shares authorized;                       |               |               |               |
| 8.70%  Class B Series II cumulative redeemable, $250 per share                           |               |               |               |
| liquidation  preference, 232,000 issued and 193,050 outstanding                          |               |               |               |
| at  September 30, 2009 and December 31, 2008, respectively                               | 48,263   |               | 48,263   |
| Common  shares, without par value, $.10 stated value; 41,000,000                         |               |               |               |
| authorized;  22,995,763 issued and 16,704,871 and 16,556,221                             |               |               |               |
| outstanding  at September 30, 2009 and December 31, 2008, respectively                   | 2,300    |               | 2,300    |
| Paid-in  capital                                                                         | 282,897  |               | 282,501  |
| Accumulated  distributions in excess of accumulated net income                           | (162,405)     |               | (159,595)     |
| Accumulated  other comprehensive loss                                                    | (1,965)       |               | (2,899)       |
| Less:   Treasury shares, at cost, 6,290,892 and 6,439,542 shares                    |               |               |               |
| at  September 30, 2009 and December 31, 2008, respectively                               | (64,324)      |               | (64,949)      |
| **Total shareholders' equity**                                                           | 104,766  |               | 105,621  |
| **Total liabilities and shareholders' equity**                                           |  $       | 667,855  |               |  $ | 699,896  |
|                                                                                          |               |               |               |
| The accompanying notes are an integral part of these  consolidated financial statements. |

 

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**ASSOCIATED ESTATESREALTY CORPORATIONCONSOLIDATED STATEMENTS OFOPERATIONS(UNAUDITED)**

|                                                                                          | Three Months Ended | Nine Months Ended |
|------------------------------------------------------------------------------------------|--------------------|-------------------|
|                                                                                          | September 30,      | September 30,     |
| *(In thousands, except per  share amounts)*                                              | 2009               |                   | 2008 |  | 2009 |  | 2008 |
| **Revenue**                                                                              |                    |                   |  |  |  |  |  |
| Property  revenue                                                                        |  $            | 32,255       |  |  $ | 33,077  |  |  $ | 96,217  |  |  $ | 95,467  |
| Management  and service company revenue:                                                 |                    |                   |  |  |  |  |  |
| Fees,  reimbursements and other                                                          | 232           |                   | 428  |  | 1,057  |  | 1,378  |
| Construction  and other services                                                         | 379           |                   | 547  |  | 730  |  | 872  |
| Total  revenue                                                                           | 32,866        |                   | 34,052  |  | 98,004  |  | 97,717  |
| **Expenses**                                                                             |                    |                   |  |  |  |  |  |
| Property  operating and maintenance                                                      | 13,999        |                   | 14,413  |  | 41,566  |  | 40,789  |
| Depreciation  and amortization                                                           | 8,502         |                   | 9,304  |  | 26,297  |  | 26,726  |
| Direct  property management and service company expense                                  | 210           |                   | 420  |  | 918  |  | 1,213  |
| Construction  and other services                                                         | 465           |                   | 578  |  | 999  |  | 1,098  |
| General  and administrative                                                              | 3,831         |                   | 3,668  |  | 10,136  |  | 10,379  |
| Total  expenses                                                                          | 27,007        |                   | 28,383  |  | 79,916  |  | 80,205  |
| Operating income                                                                         | 5,859         |                   | 5,669  |  | 18,088  |  | 17,512  |
| Interest  income                                                                         | 6             |                   | 16  |  | 41  |  | 122  |
| Interest  expense                                                                        | (8,665)            |                   | (9,012) |  | (25,586) |  | (26,624) |
| (Loss) income before gain on  insurance recoveries, equity in net                        |                    |                   |  |  |  |  |  |
| loss  of joint ventures and income from discontinued operations                          | (2,800)            |                   | (3,327) |  | (7,457) |  | (8,990) |
| Gain  on insurance recoveries                                                            | -             |                   | -  |  | 544  |  | -  |
| Equity  in net loss of joint ventures                                                    | -             |                   | (28) |  | -  |  | (72) |
| (Loss) income from  continuing operations                                                | (2,800)            |                   | (3,355) |  | (6,913) |  | (9,062) |
| 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) |
| **Net (loss) income  attributable to AERC**                                              | (2,816)            |                   | (3,043) |  | 9,026  |  | 35,423  |
| Preferred share dividends                                                                | (1,049)            |                   | (1,201) |  | (3,149) |  | (3,603) |
| Allocation to participating  securities                                                  | -             |                   | -  |  | (457) |  | (755) |
| **Net (loss) income  applicable to common shares**                                       |  $            | (3,865)           |  |  $ | (4,244) |  |  $ | 5,420  |  |  $ | 31,065  |
|                                                                                          |                    |                   |  |  |  |  |  |
| **Earnings per common share  - basic and diluted:**                                      |                    |                   |  |  |  |  |  |
| (Loss)  income from continuing operations applicable to common shares                    |  $            | (0.23)            |  |  $ | (0.28) |  |  $ | (0.61) |  |  $ | (0.78) |
| Income  from discontinued operations                                                     | -             |                   | 0.02  |  | 0.94  |  | 2.70  |
| Net  (loss) income applicable to common shares                                           |  $            | (0.23)            |  |  $ | (0.26) |  |  $ | 0.33  |  |  $ | 1.92  |
|                                                                                          |                    |                   |  |  |  |  |  |
| **Dividends declared per  common share**                                                 |  $            | 0.17         |  |  $ | 0.17  |  |  $ | 0.51  |  |  $ | 0.51  |
|                                                                                          |                    |                   |  |  |  |  |  |
| **Weighted average number  of common shares**                                            |                    |                   |  |  |  |  |  |
| **outstanding - basic and diluted**                                                      | 16,539        |                   | 16,298  |  | 16,500  |  | 16,222  |
|                                                                                          |                    |                   |  |  |  |  |  |
| The accompanying notes are an integral part of these  consolidated financial statements. |

 

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**ASSOCIATED ESTATESREALTY CORPORATIONCONSOLIDATED STATEMENTS OF CASHFLOWS(UNAUDITED)**

|                                                                                          | Nine Months Ended |
|------------------------------------------------------------------------------------------|-------------------|
|                                                                                          | September 30,     |
| *(In thousands)*                                                                         | 2009              |  | 2008 |
| **Cash flow from  operations:**                                                          |                   |  |  |
| Net  income                                                                              |  $           | 9,066  |  |  $ | 35,463  |
| Adjustments  to reconcile net income to net cash provided by operations:                 |                   |  |  |
| Depreciation  and amortization (including discontinued operations)                       | 26,771       |  | 28,376  |
| Loss  on fixed asset replacements write-off                                              | 16           |  | 85  |
| Gain  on disposition of properties                                                       | (15,411)          |  | (45,203) |
| Gain  on insurance recoveries                                                            | (544)             |  | -  |
| Amortization  of deferred financing costs and other                                      | 925          |  | 984  |
| Share-based  compensation                                                                | 1,479        |  | 1,448  |
| Equity  in net loss of joint ventures                                                    | -            |  | 72  |
| Net  change in assets and liabilities:                                                   |                   |  |  |
| Accounts  and notes receivable                                                           | 1,108        |  | 1,135  |
| Accounts  payable and accrued expenses                                                   | 2,038        |  | (2,260) |
| Other  operating assets and liabilities                                                  | (1,915)           |  | (2,252) |
| Restricted  cash                                                                         | (656)             |  | 364  |
| Total  adjustments                                                                       | 13,811       |  | (17,251) |
| Net  cash flow provided by operations                                                    | 22,877       |  | 18,212  |
| **Cash flow from investing  activities:**                                                |                   |  |  |
| Recurring  fixed asset additions                                                         | (6,240)           |  | (7,145) |
| Revenue  enhancing/non-recurring fixed asset additions                                   | (3,065)           |  | (1,291) |
| Acquisition/development  fixed asset additions                                           | (1,939)           |  | (34,484) |
| Net  proceeds from disposition of operating properties                                   | 32,714       |  | 88,348  |
| Net  cash flow provided by investing activities                                          | 21,470       |  | 45,428  |
| **Cash flow from financing  activities:**                                                |                   |  |  |
| Principal  amortization payments on mortgage notes payable                               | (2,186)           |  | (2,112) |
| Principal  repayments of mortgage notes payable                                          | (72,096)          |  | (42,851) |
| Payment  of debt procurement costs                                                       | (686)             |  | (601) |
| Proceeds  from mortgage notes obtained                                                   | 52,450       |  | -  |
| Revolving  credit facility borrowings                                                    | 131,900      |  | 93,075  |
| Revolving  credit facility repayments                                                    | (141,400)         |  | (98,575) |
| Common  share dividends paid                                                             | (8,452)           |  | (8,305) |
| Preferred  share dividends paid                                                          | (3,149)           |  | (3,603) |
| Operating  partnership distributions paid                                                | (40)              |  | (40) |
| Exercise  of stock options                                                               | -            |  | 1,843  |
| Purchase  of preferred and/or treasury shares                                            | (178)             |  | (220) |
| Net  cash flow used for financing activities                                             | (43,837)          |  | (61,389) |
| Increase in cash and cash  equivalents                                                   | 510          |  | 2,251  |
| Cash and cash equivalents,  beginning of period                                          | 3,551        |  | 1,549  |
| **Cash and cash  equivalents, end of period**                                            |  $           | 4,061  |  |  $ | 3,800  |
|                                                                                          |                   |  |  |
| Supplemental disclosure of  cash flow information:                                       |                   |  |  |
| Dividends  declared but not paid                                                         |  $           | 2,995  |  |  $ | 2,905  |
| Cash  paid for interest, net of capitalized interest                                     | 24,913       |  | 28,941  |
| Net  change in accounts payable related to fixed asset additions                         | 739          |  | 1,230  |
| Assumption  of debt in connection with property acquisition                              | -            |  | 45,002  |
|                                                                                          |                   |  |  |
| The accompanying notes are an integral part of these  consolidated financial statements. |

** **

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**ASSOCIATEDESTATES REALTY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED**

**1.         BASIS OFPRESENTATION AND ACCOUNTING POLICIES**

*Except as the context otherwise requires, all references to"we," "our," "us," "AERC" and the"Company" in this report collectively refer to Associated EstatesRealty Corporation and its consolidated subsidiaries.*

**Business**

We are a self-administered and self-managed equity real estateinvestment trust ("REIT") specializing in multifamily property management,advisory, development, acquisition, disposition, operation and ownershipactivities.  Our primary source of income is rental revenue.  Additional incomeis derived primarily from property and asset management fees.

As of September 30, 2009, our property portfolio consisted of: (i) 48apartment communities containing 12,108 units in seven states that are wholly owned,either directly or indirectly through subsidiaries; (ii) one apartment communitythat we manage for a third party owner consisting of 258 units; and (iii) a 186-unitapartment community and a commercial property containing approximately 145,000square feet that we asset manage for a government sponsored pension fund.

**Basis of Presentation**

The accompanying unaudited consolidated financial statements have beenprepared by management in accordance with accounting principles generallyaccepted in the United States of America ("GAAP") for interimfinancial information and applicable rules and regulations of the Securitiesand Exchange Commission.  Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal andrecurring adjustments considered necessary for a fair statement, have beenincluded.  The reported results of operations are not necessarily indicative ofthe results that may be expected for the full year.  These financial statementsshould be read in conjunction with the audited financial statements andaccompanying notes in our Annual Report on Form 10-K for the year endedDecember 31, 2008.  We have evaluated all subsequent events through November 3,2009, which is the date the financial statements were issued.

**SegmentReporting**

            Allof our properties are multifamily communities that have similar economiccharacteristics.  Management evaluates the performance of our properties on anindividual basis.  We previously reported separate segments primarily due tothe different operating characteristics related to our Affordable Housingproperties and to segregate third party fee management income.  However, with ourexit from the ownership and management of our Affordable Housing properties andour exit in 2009 from substantially all third party fee management, our multifamilyproperties now provide approximately 98.2% of our consolidated revenue for thenine months ended September 30, 2009.  As a result, we determined that it wouldbe appropriate to have only one reportable segment, which will be multifamilyproperties.

**NoncontrollingRedeemable Interest**

In December 2007, the Financial Accounting Standards Board ("FASB")issued guidance which establishes and expands accounting and reportingstandards for minority interests in a subsidiary and the deconsolidation of a subsidiaryand also requires minority interests to be recharacterized as noncontrollinginterests.  This guidance was effective for us January 1, 2009, and as such,the operating partnership minority interest reported in our Annual Report onForm 10-K for the year ended December 31, 2008, has been recharacterized as "Noncontrollingredeemable interest" for all periods presented.

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**Share-BasedCompensation**

During the three and nine months ended September 30, 2009, we recognizedtotal share-based compensation cost of $            432,000 and $1.5 million, respectively,in "General and administrative expense" in the ConsolidatedStatements of Operations.  During the three and nine months ended September 30,2008, we recognized total share-based compensation cost of $484,000 and $1.4million, respectively, in "General and administrative expense."

*Stock Options.*  During the nine months ended September 30, 2009,there were 58,000 options awarded and no options exercised.  During the ninemonths ended September 30, 2008, there were no stock options awarded and180,021 stock options were exercised.  We use the Black-Scholes option pricingmodel to estimate the fair value of share-based awards.  The weighted averageBlack-Scholes assumptions and fair value for options awarded during the ninemonths ended September 30, 2009, were as follows:

| Expected volatility                  |  | 39.1%     |
|--------------------------------------|--|-----------|
| Risk-free interest rate              |  | 2.6%      |
| Expected life of options (in  years) |  | 6.4  |
| Dividend yield                       |  | 8.4%      |
| Grant-date fair value                |  |  $   | 1.38 |

The expectedvolatility was based upon the historical volatility of our weekly share closingprices over a period equal to the expected life of the options granted.  Therisk-free interest rate used was the yield from U.S. Treasury bonds on the dateof grant with a maturity approximating the expected life of the options.  Theexpected life of the options was derived using our historical experience forsimilar awards.  The dividend yield was derived using our annual dividend rateas a percentage of the price of our shares on the date of grant.

*Restricted Shares*.  The following table represents restrictedshare activity for the nine months ended September 30, 2009:

|                                   |  |               |  | Weighted   |
|-----------------------------------|--|---------------|--|------------|
|                                   |  |               |  | Average    |
|                                   |  | Number of     |  | Grant Date |
|                                   |  | Shares        |  | Fair Value |
|                                   |  |               |  |            |
| Nonvested at beginning of  period |  | 189,867  |  |  $    | 11.33  |
| Granted                           |  | 184,070  |  |  $    | 5.37  |
| Vested                            |  | 110,793  |  |  $    | 9.23  |
| Forfeited                         |  | 2,018    |  |  $    | 10.06  |
| Nonvested at end of period        |  | 261,126  |  |  $    | 9.74  |

At September 30, 2009,there was $2.0 million of unrecognized compensation cost related to nonvested restrictedshare awards that we expect to recognize over a weighted average period of 2.0years.  Pursuant to the terms of the Company's Elective Deferred CompensationProgram, certain of our officers elected to defer the receipt of all or aportion of the restricted shares granted them during the nine months ended September30, 2009.

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**DerivativeInstruments and Hedging Activities**

We record all derivatives on the balance sheet at fairvalue.  The accounting for changes in the fair value of derivatives depends onthe intended use of the derivative and the resulting designation.  Derivativesused to hedge the exposure to changes in the fair value of an asset, liabilityor firm commitment attributable to a particular risk, such as interest raterisk, are considered fair value hedges.  Derivatives used to hedge the exposureto variability in expected future cash flows or other types of forecastedtransactions are considered cash flow hedges.

For derivatives designated as fair value hedges, changes inthe fair value of the derivative and the hedged item related to the hedged riskare recognized in earnings.  For derivatives designated as cash flow hedges,the effective portion of changes in the fair value of the derivative isinitially reported in other comprehensive income (outside of earnings) andsubsequently reclassified to earnings when the hedged transaction affectsearnings, and the ineffective portion of changes in the fair value of thederivative is recognized directly in earnings.  Hedge ineffectiveness is measuredby comparing the changes in fair value or cash flows of the derivative hedginginstrument with the changes in fair value or cash flows of the designatedhedged item or transaction.  For derivatives not designated as hedges, changesin fair value are recognized in earnings.

We do not use derivatives for trading or speculativepurposes.  Further, we have a policy of only entering into contracts with majorfinancial institutions based upon their credit ratings and other factors.  Whenviewed in conjunction with the underlying and offsetting exposure that thederivatives are designed to hedge, we have not sustained a material loss fromthese hedges.

We have utilized interest rate swaps and caps to addstability to interest expense and to manage our exposure to interest ratemovements.  Interest rate swaps designated as cash flow hedges involve thereceipt of variable-rate amounts in exchange for fixed-rate payments over thelife of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges involve the receipt ofvariable-rate amounts if interest rates rise above a certain level in exchangefor an up front premium.  

Interest Rate Hedge Activity:  During2007, we executed two interest rate swaps to hedge the cash flows of existingvariable rate debt.  No hedge ineffectiveness on these cash flow hedges wasrecognized during the nine months ended September 30, 2009.  Amounts reportedin "Accumulated other comprehensive loss" related to derivatives willbe reclassified to "Interest expense" as interest payments are madeon our variable-rate debt.  During the next twelve months, we estimate thatapproximately $1.9 million will be reclassified from "Accumulated othercomprehensive loss" as an increase to "Interest expense."  The followingtable presents the notional amounts of the swaps as of September 30, 2009:

| *(Dollar amount in  thousands)* |  | Number of   |  | Notional |
|---------------------------------|--|-------------|--|----------|
| Interest Rate Derivative        |  | Instruments |  | Amounts  |
| Interest rate swaps             |  | 2           |  |  $  | 63,000 |

 

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            Thefollowing table presents the fair value of our derivative financial instrumentsas well as their classification on the Consolidated Balance Sheets (see Note 7for additional information regarding the fair value of these derivativeinstruments):

| Fair Value of Derivative Instruments |
|--------------------------------------|
|                                      |  |  |  |  |  |  |  |  |
|                                      |  | Liability Derivatives |
|                                      |  | As of September 30, 2009 |  | As of December 31, 2008 |
|                                      |  |  |  |  |  |  |  |  |
| *(In thousands)*                     |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |
| Derivatives designated as            |  |  |  |  |  |  |  |  |
|   hedging  instruments:    |  |  |  |  |  |  |  |  |
|                                      |  |  |  |  |  |  |  |  |
| Interest rate swaps                  |  |  Accounts payable, accrued |  |  |  |  Accounts payable, accrued |  |  |
|                                      |  |  expenses  and other liabilities |  |  $ | 1,965  |  |  expenses  and other liabilities |  |  $ | 2,899  |

            The following table presentsthe effect of our derivative financial instruments on the ConsolidatedStatements of Operations (see Note 5 for additional information regarding theeffect of these derivative instruments on total comprehensive income):

| The Effect of Derivative Instruments on the  Consolidated Statements of Operations |
|------------------------------------------------------------------------------------|
|                                                                                    |  |  |  |  |  |  |  |  |  |  |
|                                                                                    |  | Amount of Gain or |  |  |  | Amount of Gain or (Loss) |
|                                                                                    |  | (Loss) Recognized |  |  |  | Reclassified from |
|                                                                                    |  | in OCI on Derivative |  | Location of Gain |  | Accumulated OCI into Income |
| *(In thousands)*                                                                   |  | (Effective Portion) |  | or (Loss) |  | (Effective Portion) |
|                                                                                    |  | Three Months |  | Nine Months |  | Reclassified from |  | Three Months |  | Nine Months |
| Derivatives in Cash                                                                |  | Ended |  | Ended |  | Accumulated OCI |  | Ended |  | Ended |
| Flow Hedging                                                                       |  | September 30, |  | September 30, |  | into Income |  | September 30, |  | September 30, |
| Relationships                                                                      |  | 2009 |  | 2009 |  | (Effective Portion) |  | 2009 |  | 2009 |
| Interest rate swaps                                                                |  |  $ | (440) |  |  $ | (655) |  |  Interest  expense |  |  $ | 625  |  |  $ | 1,589  |

Wehave agreements with each of our derivative counterparties that contain a provisionwhere if we either default or are capable of being declared in default on anyof our indebtedness, then such counterparty can declare us to be in default on ourderivative obligations. 

Wehave an agreement with a derivative counterparty that incorporates the loancovenant provisions of our indebtedness with a lender affiliate of thederivative counterparty. Failure to comply with the loan covenant provisionswould result in our being in default on any derivative instrument obligationscovered by the agreement.

Asof September 30, 2009, the fair value of derivatives in a net liabilityposition, which includes accrued interest but excludes any adjustment fornonperformance risk, related to these agreements was $2.2 million. As of September30, 2009, we have not posted any collateral related to these agreements. If we hadbreached any of these provisions at September 30, 2009, we would have beenrequired to settle our obligations under the agreements at their terminationvalue of $2.2 million.** **

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**Classificationof Fixed Asset Additions**

We define recurring fixed asset additions to a property to be capitalexpenditures made to replace worn out assets to maintain the property's value. Revenue enhancing/non-recurring fixed asset additions are defined as capitalexpenditures that increase the value of the property and/or enable us toincrease rents.  Acquisition/development fixed asset additions are defined as capitalexpenditures for the purchase or construction of new properties to be added toour portfolio, or fixed asset additions identified at the time of purchase thatare not made until subsequent periods.

**Reclassifications**

Certain reclassifications have been made to the 2008 financialstatements to conform to the 2009 presentation.

**2.         DEVELOPMENT AND DISPOSITIONACTIVITY**

**DevelopmentActivity**

            Werecently commenced construction of a 60-unit expansion of the existing 240-unitRiver Forest apartment community located in the Richmond, Virginia metropolitanmarket area.  Construction in progress related to this development was $2.0 millionat September 30, 2009 and includes capitalized interest costs on funds used inconstruction and real estate taxes and insurance.  Capitalized interest costsfor the three and nine months ended September 30, 2009 were $41,000 and$66,000, respectively.

**DispositionActivity**

We report the results of operations and gain/loss related to the sale ofreal estate assets as discontinued operations.  Real estate assets that areclassified as held for sale are also reported as discontinued operations.  Weclassify properties as held for sale when all significant contingenciessurrounding the closing have been resolved.  In most transactions, thesecontingencies are not satisfied until the actual closing of the transaction. Interest expense included in discontinued operations is limited to interest onmortgage debt specifically associated with properties sold or classified asheld for sale.  

On June 17, 2009, we completed the sale of Chestnut Ridge apartments, a468-unit property located in Pittsburgh, Pennsylvania.  The sales price was$29.8 million and we recorded a gain of $13.1 million.  

On January 9, 2009, we completed the sale of Bay Club apartments, a96-unit property located in Northeast Ohio.  The sales price was $4.1 million andwe recorded a gain of $2.3 million.  

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"Income from discontinued operations" in the accompanyingConsolidated Statements of Operations for the three and nine months ended September30, 2009 and 2008, includes the operating results for the properties sold in2009 and prior years, as well as the gains recognized on properties sold duringeach reporting period.   The following table summarizes "Income fromdiscontinued operations:"

|                                          | Three Months Ended |         | Nine Months Ended |
|------------------------------------------|--------------------|---------|-------------------|
|                                          | September 30,      |         | September 30,     |
| *(In thousands)*                         | 2009               |         | 2008              |  | 2009 |  | 2008 |
| **REVENUE**                              |                    |         |                   |  |  |  |  |
| Property revenue                         |  $            | -  |                   |  $ | 1,292  |  |  $ | 2,021  |  |  $ | 7,850  |
|                                          |                    |         |                   |  |  |  |  |
| **EXPENSES**                             |                    |         |                   |  |  |  |  |
| Property operating and  maintenance      | -             |         | 479          |  | 948  |  | 3,868  |
| Depreciation and  amortization           | -             |         | 298          |  | 474  |  | 1,650  |
| Total  expenses                          | -             |         | 777          |  | 1,422  |  | 5,518  |
| Operating income                         | -             |         | 515          |  | 599  |  | 2,332  |
| Interest income                          | -             |         | -            |  | -  |  | 5  |
| Interest expense (1)                     | -             |         | (190)             |  | (31) |  | (3,015) |
| Gain on disposition of  properties       | (2)                |         | -            |  | 15,411  |  | 45,203  |
| **Income from discontinued  operations** |  $            | (2)     |                   |  $ | 325  |  |  $ | 15,979  |  |  $ | 44,525  |

 

| (1) | Interest expense for the nine  months ended September 30, 2008 includes $2.0 million of defeasance and other  prepayment costs. |
|-----|---------------------------------------------------------------------------------------------------------------------------------|

**3.         DEBT**

The following table identifies ourtotal debt outstanding and weighted average interest rates:

|                                      | September 30, 2009 |               | December 31, 2008 |
|--------------------------------------|--------------------|---------------|-------------------|
|                                      | Balance            |               | Weighted Average  |  | Balance |  | Weighted Average |
| *(Dollar amounts in  thousands)*     | Outstanding        |               | Interest Rate     |  | Outstanding |  | Interest Rate |
| **FIXED RATE DEBT**                  |                    |               |                   |  |  |  |  |
| Mortgages payable - CMBS             |  $            | 116,000  |                   | 7.7% |  |  $ | 154,685  |  | 7.7% |
| Mortgages payable - other (1)        | 337,385       |               | 5.8%              |  | 320,516  |  | 5.8% |
| Unsecured borrowings                 | 25,780        |               | 7.9%              |  | 25,780  |  | 7.9% |
| **Total  fixed rate debt**           | 479,165       |               | 6.4%              |  | 500,981  |  | 6.5% |
| ** **                           |                    |               |                   |  |  |  |  |
| **VARIABLE RATE DEBT**               |                    |               |                   |  |  |  |  |
| Mortgages payable                    | 34,984        |               | 4.7%              |  | 35,000  |  | 1.6% |
| Unsecured revolving credit  facility | 12,000        |               | 1.8%              |  | 21,500  |  | 3.7% |
| **Total  variable rate debt**        | 46,984        |               | 4.0%              |  | 56,500  |  | 2.4% |
| **Total  debt**                      |  $            | 526,149  |                   | 6.2% |  |  $ | 557,481  |  | 6.1% |

 

| (1) | Includes $63.0 million of  variable rate debt swapped to fixed as of September 30, 2009 and December 31,  2008. |
|-----|-----------------------------------------------------------------------------------------------------------------|

 

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**Mortgage Notes Payable**

The following table provides information on loans repaid at par as wellas loans obtained during 2009:

| *(Dollar amounts in  thousands)* |  | Loans Repaid |              |      | Loans Obtained |
|----------------------------------|--|--------------|--------------|------|----------------|
| Property                         |  | Amount       |              | Rate |                |  | Amount |  | Rate |  | Maturity |
| Saw Mill Village                 |  |  $      | 11,119  |      | 7.5%           |  |  |  $ | 17,220  |  | 6.0% |  | April 2016 |
| Georgetown Park                  |  | 16,000  |              | 1.6% | (1)            |  | -  |  | N/A |  | N/A |
| Chestnut Ridge                   |  | 19,000  |              | 1.4% | (1)            |  | -  |  | N/A |  | N/A |
| Oaks at Hampton                  |  | 25,977  |              | 7.5% |                |  | -  |  | N/A |  | N/A |
| Steeplechase at Shiloh           |  | -       |              | N/A  |                |  | 13,790  |  | 4.7% | (1) | March 2016 |
| Courtney Chase                   |  | -       |              | N/A  |                |  | 21,440  |  | 4.7% | (1) | March 2016 |
|                                  |  |  $      | 72,096  |      | 4.6%           | (2) |  |  $ | 52,450  |  | 5.1% | (2) |  |

 

| (1) | Denotes  variable rate loans.  Variable rates on loans obtained are as of September 30,  2009. |
|-----|-----------------------------------------------------------------------------------------------------|
| (2) | Represents  weighted average interest rate for the loans listed.                                    |

During 2008, 2007and 2006, we defeased 21 CMBS loans.  These loans were defeased pursuant to theterms of the underlying loan documents.  In accordance with GAAP, we removedthose financial assets and the mortgage loans from our financial records.  Allrisk of loss associated with these defeasances have been transferred from us tothe successor borrower and any ongoing relationship between the successorborrower and us was deemed inconsequential at the time of completion of the respectivetransfers.  However, we subsequently learned that certain defeasancetransactions, completed prior to June 2007, could enable us to receive a refundof a portion of the costs incurred in connection with the transaction.  Duringthe first quarter of 2009, we received refunds of $563,000, which were includedas a reduction to interest expense.  It is possible that we may receiveadditional refunds in the future, however such amounts cannot be estimated dueto the uncertainty of future payments, and we believe that any amounts we mayreceive would not be material to our consolidated financial position, cash flowor results of operations.

**4.         GOODWILLAND OTHER INTANGIBLE ASSETS**

**Goodwill**

In June 1998, we recorded goodwill in connection with the MIG RealtyAdvisors, Inc. merger.   We have a policy of completing our annual review ofgoodwill during the first quarter of each year and more frequently if events orchanges in circumstances indicate that the carrying value may not berecoverable.  The review that was completed during the three months ended March31, 2009 determined that goodwill was not impaired and no other events haveoccurred which would require that goodwill be reevaluated and as such therewere no changes to the carrying value of goodwill as of September 30, 2009.  Inperforming this analysis, we use a multiple of revenues to the range ofpotential alternatives and assign a probability of the various alternativesunder consideration by management.  Should the estimates used to determinealternatives or the probabilities of the occurrence thereof change, impairmentmay result which could materially impact our results of operations for theperiod in which it is recorded**.**

**IntangibleAssets**

We allocate aportion of the total purchase price of a property acquisition to any intangibleassets identified, such as existing leases and tenant relationships.  Theintangible assets are amortized over the remaining lease terms or estimatedlife of the tenant relationship, which is approximately 12 to 16 months.  Dueto the short term nature of residential leases, we believe that existing leaserates approximate market rates; therefore, no allocation is made for above/belowmarket leases.

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**5.         SHAREHOLDERS' EQUITY**

The following table provides a reconciliation of activity in Shareholders'equity accounts:

|                                                                            | Nine Months   |               | Twelve Months |
|----------------------------------------------------------------------------|---------------|---------------|---------------|
|                                                                            | Ended         |               | Ended         |
|                                                                            | September 30, |               | December 31,  |
| *(In thousands)*                                                           | 2009          |               | 2008          |
| **Noncontrolling redeemable  interest**                                    |               |               |               |
| Balance outstanding at  beginning of period                                |  $       | 1,829    |               |  $ | 1,829  |
| Balance outstanding at end  of period                                      |  $       | 1,829    |               |  $ | 1,829  |
| * *                                                                   |               |               |               |
| **Preferred shares**                                                       |               |               |               |
| Balance outstanding at  beginning of period                                |  $       | 48,263   |               |  $ | 55,213  |
| Purchase and retirement of  Class B Cumulative Redeemable Preferred Shares | -        |               | (6,950)       |
| Balance outstanding at end  of period                                      | 48,263   |               | 48,263   |
|                                                                            |               |               |               |
| **Common shares (at $.10  stated value)**                                  |               |               |               |
| Balance outstanding at  beginning and end of period                        | 2,300    |               | 2,300    |
|                                                                            |               |               |               |
| **Paid-in capital**                                                        |               |               |               |
| Balance outstanding at  beginning of period                                | 282,501  |               | 281,152  |
| Share based compensation                                                   | 396      |               | 1,294    |
| Shares issued from treasury  for stock option exercises                    | -        |               | (88)          |
| Purchase and retirement of  Class B Cumulative Redeemable Preferred Shares | -        |               | 143      |
| Balance outstanding at end  of period                                      | 282,897  |               | 282,501  |
|                                                                            |               |               |               |
| **Accumulated distributions  in excess of accumulated net income**         |               |               |               |
| Balance outstanding at  beginning of period                                | (159,595)     |               | (180,436)     |
| Net income                                                                 | 9,066    |               | 34,680   |
| Net loss attributable to  noncontrolling redeemable interest               | (40)          |               | (53)          |
| Share based compensation                                                   | 5        |               | 8        |
| Purchase and retirement of  Class B Cumulative Redeemable Preferred Shares | -        |               | 2,146    |
| Common share dividends  declared                                           | (8,692)       |               | (11,285)      |
| Preferred share dividends  declared                                        | (3,149)       |               | (4,655)       |
| Balance outstanding at end  of period                                      | (162,405)     |               | (159,595)     |
|                                                                            |               |               |               |
| **Accumulated other  comprehensive loss**                                  |               |               |               |
| Balance outstanding at  beginning of period                                | (2,899)       |               | (1,050)       |
| Change in fair value of  hedge instruments                                 | 934      |               | (1,849)       |
| Balance outstanding at end  of period                                      | (1,965)       |               | (2,899)       |
|                                                                            |               |               |               |
| **Treasury shares (at cost)**                                              |               |               |               |
| Balance outstanding at  beginning of period                                | (64,949)      |               | (67,393)      |
| Purchase of common shares                                                  | (178)         |               | (221)         |
| Share based compensation                                                   | 803      |               | 734      |
| Shares issued from treasury  for stock option exercises                    | -        |               | 1,931    |
| Balance outstanding at end  of period                                      | (64,324)      |               | (64,949)      |
| **Total shareholders'  equity**                                            |  $       | 104,766  |               |  $ | 105,621  |

 

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            Thefollowing table identifies total comprehensive income:

| ** **                                 | Nine Months Ended |
|--------------------------------------------|-------------------|
| ** **                                 | September 30,     |
| *(In thousands)*                           | 2009              |  | 2008 |
| Comprehensive income:                      |                   |  |  |
| Net income attributable to  AERC           |  $           | 9,026  |  |  $ | 35,423  |
| Other comprehensive income  (loss):        |                   |  |  |
| Change  in fair value of hedge instruments | 934          |  | (275) |
| Total comprehensive income                 |  $           | 9,960  |  |  $ | 35,148  |

**6.         EARNINGS PER SHARE**

In June 2008, the FASB issued guidance which clarifies that nonvestedawards containing nonforfeitable dividend rights are participating securitiesand are therefore required to be included in the computations of basic anddiluted earnings per share.  This guidance was effective for us January 1,2009, and requires retrospective application to all periods presented.

There were 1.4million options to purchase common shares outstanding at September 30, 2009 and2008.  The dilutive effect of these options were not included in thecalculation of diluted earnings per share for the periods presented as theirinclusion would be antidilutive to the net loss applicable to common sharesfrom continuing operations.

The exchange of operating partnership noncontrolling interests intocommon shares was also not included in the computation of diluted EPS becausewe intend to settle these OP units in cash.

The following table presents a reconciliation of basic and dilutedearnings per common share:

| ** **                                                              | Three Months Ended |         | Nine Months Ended |
|-------------------------------------------------------------------------|--------------------|---------|-------------------|
| ** **                                                              | September 30,      |         | September 30,     |
| *(In thousands)*                                                        | 2009               |         | 2008              |  | 2009 |  | 2008 |
| **Numerator - basic and  diluted:**                                     |                    |         |                   |  |  |  |  |
| (Loss) income from  continuing operations                               |  $            | (2,800) |                   |  $ | (3,355) |  |  $ | (6,913) |  |  $ | (9,062) |
| Net  income attributable to noncontrolling redeemable interest          | (14)               |         | (13)              |  | (40) |  | (40) |
| Preferred  share dividends                                              | (1,049)            |         | (1,201)           |  | (3,149) |  | (3,603) |
| (Loss) income from  continuing operations applicable to common shares   |  $            | (3,863) |                   |  $ | (4,569) |  |  $ | (10,102) |  |  $ | (12,705) |
|                                                                         |                    |         |                   |  |  |  |  |
| Income from discontinued  operations                                    |  $            | (2)     |                   |  $ | 325  |  |  $ | 15,979  |  |  $ | 44,525  |
| Allocation  to participating securities                                 | -             |         | -            |  | (457) |  | (755) |
| Income from discontinued  operations applicable to common shares        |  $            | (2)     |                   |  $ | 325  |  |  $ | 15,522  |  |  $ | 43,770  |
|                                                                         |                    |         |                   |  |  |  |  |
|                                                                         |                    |         |                   |  |  |  |  |
| **Denominator - basic and  diluted:**                                   | 16,539        |         | 16,298       |  | 16,500  |  | 16,222  |
|                                                                         |                    |         |                   |  |  |  |  |
| **Net income (loss)  applicable to common shares - basic and diluted:** |                    |         |                   |  |  |  |  |
| (Loss) income from  continuing operations applicable to common shares   |  $            | (0.23)  |                   |  $ | (0.28) |  |  $ | (0.61) |  |  $ | (0.78) |
| Income from discontinued  operations                                    | -             |         | 0.02         |  | 0.94  |  | 2.70  |
| Net income (loss) applicable  to common shares - basic and diluted      |  $            | (0.23)  |                   |  $ | (0.26) |  |  $ | 0.33  |  |  $ | 1.92  |

 

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**7.         FAIR VALUE**

Fair value determined   in accordance with GAAP should be based on theassumptions that market participants would use when pricing certain assets orliabilities.  Inputs used in determining fair value should be from the highestlevel available in the following hierarchy:

| • | Level 1 inputs utilize quoted  prices (unadjusted) in active markets for identical assets or liabilities  that we have the ability to access;                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | Level 2 inputs may include  quoted prices for similar assets and liabilities in active markets, as well  as interest rates and yield curves that are observable at commonly quoted  intervals; and |
| • | Level 3 inputs are unobservable  inputs for the asset or liability that are typically based on an entity’s own  assumptions as there is little, if any, related market activity.              |

In instances wherethe determination of the fair value measurement is based on inputs fromdifferent levels of the fair value hierarchy, the fair value measurement willfall within the lowest level input that is significant to the fair valuemeasurement in its entirety.

The following table presents the financial liabilities that we measuredat fair value on a recurring basis as of September 30, 2009:

| *(In thousands)*    |  | Level 1 |                     | Level 2 |   | Level 3     |  | Total |
|---------------------|--|---------|---------------------|---------|---|-------------|--|-------|
| Interest rate swaps |  | $       | -    |         | $ | 1,965  |  | $     | -    |  | $ | 1,965  |
|                     |  |         |                     |         |   |             |  |       |  |  |  |  |

We incorporatecredit valuation adjustments to appropriately reflect both our ownnonperformance risk and that of the respective counterparty in the fair valuemeasurements.  The credit valuation adjustments utilize Level 3 inputs, such asestimates of current credit spreads, to evaluate the likelihood of default by eitherthe respective counterparty or us.  However, we determined that as of September30, 2009, the impact of the credit valuation adjustments were not significantto the overall valuation of the swaps.  See "Derivative Instruments and HedgingActivities" in Note 1 for additional information regarding the swaps.

            Rents, accounts andnotes receivable, other assets, accounts payable, accrued expenses and otherliabilities are carried at amounts that reasonably approximate correspondingfair values.

            Mortgage notes payable, revolving debt and other unsecured debtwith an aggregate carrying value of $526.1 million and $557.5 million at September30, 2009, and December 31, 2008, respectively, have an estimated aggregate fairvalue of $538.1 million and $549.0 million, respectively.  Estimated fair valueis based on interest rates available to us as of the dates reported on forissuance of debt with similar terms and remaining maturities.  Considerablejudgment is necessary to interpret market data and develop estimated fairvalues.  Accordingly, the estimates presented herein are not necessarilyindicative of the amounts we could realize on disposition of the financialinstruments.  The use of different market assumptions and/or estimationmethodologies may have a material effect on the estimated fair value amounts.

**8.         GAINON INSURANCE RECOVERIES**

              In June 2009, we settleda wind storm damage insurance claim involving 13 of our central Ohio propertiesfor the aggregate sum of $906,000, net of our deductible.  In accordance withGAAP, we recorded this settlement as a gain on insurance recoveries.  The roofsof five of these properties sustained extensive damage and were replaced.  Wereported a gain on insurance recoveries of $544,000 in the ConsolidatedStatements of Income for the nine months ended September 30, 2009, which representsinsurance proceeds to be received net of the carrying value of the assetswritten off and costs incurred to make repairs.

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**9.         CONTINGENCIES**

**LegalProceedings**

We are subject to legal proceedings, lawsuits and other claims,including proceedings by government authorities (collectively"Litigation").  Litigation is subject to uncertainties and outcomesare difficult to predict.  Consequently, we are unable to estimate ultimateaggregate monetary liability or financial impact with respect to the Litigationmatter described in the following paragraph as of September 30, 2009, and noaccrual has been made for this matter.  We believe that other Litigation willnot have a material adverse impact on us after final disposition.  However,because of the uncertainties of Litigation, one or more lawsuits couldultimately result in a material obligation.

**Pending Lawsuits**

On or about April14, 2002, Melanie and Kyle Kopp commenced an action against us in the FranklinCounty, Ohio Court of Common Pleas seeking undetermined damages, injunctiverelief and class action certification.  This case arose out of our Suredepositprogram.  This program allowed cash short prospective residents to purchase abond in lieu of paying a security deposit.  The bond serves as a fund to paythose resident obligations that would otherwise have been funded by thesecurity deposit.  Plaintiffs allege that the nonrefundable premium paid forthe bond is a disguised form of security deposit, which is otherwise requiredto be refundable in accordance with Ohio's Landlord-Tenant Act.  Plaintiffsfurther allege that certain pet deposits and other nonrefundable depositsrequired by us are similarly security deposits that must be refundable inaccordance with Ohio's Landlord-Tenant Act.  On or about January 15, 2004, the Plaintiffs filed a motionfor class certification.  We subsequently filed a motion for summary judgment.  Onor about September 3, 2008, the court granted our motion for summary judgmentthereby dismissing all Plaintiff claims against us.  However, Plaintiffsubsequently appealed the court’s ruling to the Ohio Court of Appeals for the10th District, which dismissed the appeal on technical grounds. Thetechnical issues have now been resolved, Plaintiff has refiled its appeal andwe are now awaiting the Court of Appeals decision.

**10.        SUBSEQUENTEVENTS**

**Dividends**  

On November 2,2009, we paid a dividend of $0.17 per common share to shareholders of record onOctober 15, 2009, which was declared on September 15, 2009. 

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**ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The followingdiscussion should be read in conjunction with the consolidated financialstatements and notes thereto included in Part I, Item 1 of this report on Form10-Q.  This discussion may contain forward-looking statements based on currentjudgments and current knowledge of management, which are subject to certainrisks, trends and uncertainties that could cause actual results to vary fromthose projected, including but not limited to, expectations regarding our 2009performance which are based on certain assumptions.  Accordingly, readers arecautioned not to place undue reliance on forward-looking statements that speakonly as of the date of the document.  These forward-looking statements areintended to be covered by the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995.  The words "expects," "projects,""believes," "plans," "anticipates" and similarexpressions are intended to identify forward-looking statements.  Investors arecautioned that these forward-looking statements involve risks and uncertaintythat could cause actual results to differ from estimates or projectionscontained in these forward-looking statements, including without limitation thefollowing:

| •     | 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.                                                                                                                                                  |

| 17 |
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**Overview.**

We are engagedprimarily in the ownership and operation of multifamily residential units.  Wealso provide asset and property management services to third party owners ofmultifamily residential units.  Our primary source of cash and revenue fromoperations is rents from the leasing of owned apartment units, which represented98.2% of our consolidated revenue for the nine months ended September 30, 2009.

The operating performance of our properties is affected by generaleconomic trends including, but not limited to, factors such as householdformation, job growth, unemployment rates, population growth, immigration, thesupply of new multifamily rental communities and the supply of other housingalternatives, such as condominiums, single and multifamily rental homes andowner occupied single and multifamily homes.  Additionally, our performance maybe affected by access to, and the cost of capital.

Rental revenue collections are a combination of rental rates, occupancylevels and rent concessions.  We attempt to adjust these factors to adapt tochanging market conditions, thus allowing us to maximize rental income. Indicators that we use in measuring these factors include physical occupancyand net collected rent per unit.  These indicators are more fully described inthe Results of Operations comparison.  Additionally, we consider property NetOperating Income ("NOI") to be an important indicator of our overallperformance.  Property NOI (property operating revenue less property operatingand maintenance expenses) is a measure of the profitability of our propertiesand 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

** **

**ForecastQualification.**  The uncertainties caused by the current economic turndownand the unprecedented financial crisis complicate our ability to forecastfuture performance and disposition/acquisition activity. We believe that theapartment industry is better situated to weather the recession and financialcrisis than other real estate sectors, because people will normally chooseshelter over discretionary spending such as going to the mall or hotel staysand because government sponsored agencies such as Fannie Mae and Freddie Maccontinue to provide needed financing and refinancing credit facilities, whichare otherwise unavailable to other commercial real estate sectors.

| 18 |
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**LIQUIDITY AND CAPITALRESOURCES**

            Cash Flows andLiquidity.  Significant sources and uses of cash during the nine months ended September30, 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 primarysources of liquidity are cash flow provided by operations, short-termborrowings on our unsecured revolving credit facility (the "revolver")and proceeds from property sales.  We believe that we are well positioned toweather the recent turmoil in the financial markets.  Four mortgage loanstotaling approximately $72.2 million were scheduled to mature in 2009.  Duringthe first half of 2009, we repaid $52.5 million of the maturing debt with fundsfrom new mortgage loans that mature in 2016 and we utilized short term fundingfrom our revolver for the remaining $19.7 million.  The revolver borrowing wasrepaid with funds received from the sale of a 468-unit property located inPennsylvania in June 2009.  As of September 30, 2009, our revolver had $138.0million available for borrowing and matures on March 11, 2011.

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

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

In addition to the developmentcosts of $5.0 million, we anticipate funding approximately $3.4 million forrecurring, revenue enhancing and nonrecurring capital expenditures for theremainder of 2009.  These expenditures are expected to be funded largely fromcash flow provided by operations.

Any futuremultifamily property acquisitions or developments would be financed with themost appropriate sources of capital, which may include secured or unsecureddebt financings, borrowings on the revolver, the assumption of mortgageindebtedness, bank and other institutional borrowings, the exchange ofproperties, undistributed earnings and debt or equity issuances under oureffective shelf registration.

We anticipate that we will meet our 2009 liquidity requirements throughcash flow provided by operations.  We believe that this and other sources, suchas the revolver, should be sufficient to meet operating requirements, capitaladditions, mortgage amortization payments and the payment of dividends inaccordance with REIT requirements.  We anticipate that we will continue paying ourregular quarterly dividends in cash.

| 19 |
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**RESULTSOF OPERATIONS**

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

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

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

NOI for the Same Community portfolio decreased during both the three andnine month comparison periods.  The decrease in both comparison periods wasprimarily attributable to reductions in property revenue at our Southeastproperties 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 determinedby deducting property operating and maintenance expenses from property revenue(excluding amounts classified as discontinued operations) for our propertiesand deducting direct property management and service company expenses andconstruction and other services expenses from management and service companyrevenue for the management and service operations.  We consider NOI to be anappropriate supplemental measure of our performance because it reflects theoperating performance of our real estate portfolio and management and servicecompanies at the property and management and service company level and is usedto 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 flowfrom operating activities (determined in accordance with GAAP) or (iv) as ameasure of liquidity; nor is it necessarily indicative of sufficient cash flowto fund all of our needs.  Other real estate companies may define NOI in adifferent manner.

|       20 |
|----------------------------------------|

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A reconciliation of NOI to total consolidated net (loss) incomeattributable 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 chartreflects the amount and percentage change in line items that are relevant tothe 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)% |

 

| 21 |
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*Property revenue.*  Property revenue is impacted by a combinationof rental rates, rent concessions and occupancy levels, i.e., net collectedrent per unit.  Physical occupancy at the end of each period and net collectedrent 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 propertyrevenue for the Midwest portfolio during the three month comparison period isprimarily due to an increase in vacancy losses, while net rents remainedconstant.  The increase in property revenue for the Midwest portfolio duringthe nine month comparison period is primarily a result of an increase in netrents while vacancy losses remained consistent.  Property revenue in theMid-Atlantic properties increased during the nine month comparison periodprimarily due to net rent increases which were partially offset by an increasein the amount of vacancy losses; however, during the three month comparisonperiod vacancy losses were greater than net rent increases resulting in areduction in property revenue.  Property revenue for the Southeast portfolio decreasedduring 2009 in both comparison periods primarily due to reductions in net rentand increases in the amount of vacancy losses.

|    22 |
|------------|

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*Property operating and maintenance expenses.*  Property operatingand maintenance expenses decreased in 2009 during the three month comparisonperiod primarily as a result of reductions in repairs and maintenanceexpenses.  Property operating and maintenance expenses increased in 2009 forthe nine comparison period primarily as a result of increases in personnel andutilities expenses related to the properties acquired in 2008.  

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

*Interest expense. *Interest expense decreased in 2009 during thenine month comparison period primarily due to the receipt in the first quarterof 2009 of refunds totaling $563,000 in defeasance costs in connection with certainpreviously defeased loans and decreased interest expense of $200,000 forborrowings on our revolver. 

*Income fromDiscontinued Operations.*  Discontinued operations include the operatingresults and gains related to the sales of two properties sold in 2009 and 15 propertiesthat were sold during 2008.  Defeasance/prepayment costs recognized in 2008totaling $2.0 million were included in discontinued operations.  For furtherdetails on "Income from discontinued operations," see Note 2 of theNotes to Consolidated Financial Statements presented in Part I, Item 1 of thisreport on Form 10-Q.

**CONTINGENCIES**

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

**ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

We are exposed tointerest rate changes associated with variable rate debt and the refinancingrisk on our fixed-rate debt.  Based on our variable rate debt outstanding at September30, 2009 and 2008, an interest rate change of 100 basis points would impactinterest expense approximately $470,000 and $495,000 on an annual basis,respectively. We occasionally use derivative instruments to manage our exposureto interest rates.  See Note 1 of the Notes to Consolidated FinancialStatements presented in Part I, Item 1 of this report on Form 10-Q foradditional information regarding derivative instruments and "Item 7AQualitative and Quantitative Disclosures About Market Risk" of our AnnualReport on Form 10-K for the year ended December 31, 2008, for a more completediscussion of interest rate sensitive assets and liabilities.

**ITEM 4. CONTROLS AND PROCEDURES**

*Disclosure Controlsand Procedures.*  We have evaluated the design and operations of ourdisclosure controls and procedures to determine whether they are effective inensuring that the disclosure of required information is timely made inaccordance with the Securities Exchange Act of 1934 ("Exchange Act")and the rules and forms of the Securities and Exchange Commission.  Thisevaluation was made under the supervision and with the participation ofmanagement, including our Chief Executive Officer ("CEO") and ChiefFinancial Officer ("CFO"), as of the end of the period covered bythis report on Form 10-Q.  The CEO and CFO have concluded, based on theirreview, that our disclosure controls and procedures, as defined in Exchange ActRules 13a-15(e) and 15d-15(e), are effective to ensure that informationrequired to be disclosed in reports that we file under the Exchange Act is (i) recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms, and (ii) accumulated andcommunicated to management, including the principal executive and principalfinancial officers, as appropriate, to allow timely decisions regardingdisclosure.

|         23 |
|-----------------------------------------------|

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*Changes in Internal Control over Financial Reporting.*  There wereno changes in our internal control over financial reporting during the third quarterof 2009 that materially affected, or are reasonably likely to materiallyaffect, internal control over financial reporting.

We believe thatbecause of its inherent limitations, internal control over financial reportingmay not always prevent or detect misstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

**PART II.     OTHER INFORMATION**

**ITEM 1.      LEGAL PROCEEDINGS**

For informationrelated to legal proceedings, see Note 9 of the Notes to Consolidated FinancialStatements presented in Part I, Item 1 of this report on Form 10-Q.

**ITEM 1A.   RISKFACTORS**

See "RiskFactors" in Part I, Item 1A of our Annual Report on Form 10-K for the yearended December 31, 2008.

**ITEM 2.      UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

| Issuer Purchases of Equity Securities for the Three  Months Ended September 30, 2009 |
|--------------------------------------------------------------------------------------|
|                                                                                      |  |  |  |  |  |  |  |  |
|                                                                                      |  |  |  |  |  |  |  | Approximate |
|                                                                                      |  |  |  |  |  |  |  | Dollar Value of |
|                                                                                      |  |  |  |  |  | Total Number of |  | Shares That May |
|                                                                                      |  |  |  |  |  | Shares Purchased |  | Yet Be Purchased |
|                                                                                      |  | Total Number |  | Average |  | As Part of |  | Under the Plans |
|                                                                                      |  | of Shares |  | Price Paid |  | Publicly Announced |  | or Programs |
| Period                                                                               |  | Purchased |  | Per Share |  | Plans or Programs |  | (in thousands) |
| July 1 through                                                                       |  |  |  |  |  |  |  |  |
| July  31                                                                             |  | -    |  |  $ | -    |  | -    |  |  $ | 26,288  |
| August 1 through                                                                     |  |  |  |  |  |  |  |  |
| August  31                                                                           |  | 107  |  | 8.15  |  | -    |  | 26,288  |
| September 1 through                                                                  |  |  |  |  |  |  |  |  |
| September  30                                                                        |  | 3  |  | 8.77  |  | -    |  | 26,288  |
| Total                                                                                |  | 110  |  |  $ | 8.17  |  | -    |  |  |

In December 2008, ourBoard of Directors authorized the repurchase of up to $25.0 million of ourcommon and/or preferred shares.  This authorization is in addition to the $1.3million remaining on our $50.0 million authorization, which was originallyapproved by our Board of Directors in July 2005 and October 2006. Additionally, we have a policy, which allows employees to pay their portion of theincome taxes related to restricted share vesting by surrendering a number ofshares to us equal in value on the day of vesting to the amount of taxes due upto the minimum statutory withholding amount.

| 24 |
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**ITEM 6.     EXHIBITS**

| ** **                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Filed herewith or**                               |
|--------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|
| ** **                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **incorporated herein**                             |
| **Number**                     | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **by reference**                                    |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                               |            |                                                     |
| 3.1                            |            | Amendment to Second Amended  and Restated Articles of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                               |            | Exhibit 3.1 to Form 8-K  filed December 8, 2004.    |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                               |            |                                                     |
| 3.2                            |            | Second Amended and Restated  Articles of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                            |            | Exhibit 3.2 to Form 10-Q  filed July 31, 2007.      |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                           |            |                                                     |
| 3.3                            |            | Amended and Restated Code of  Regulations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                          |            | Exhibit 3.3 to Form 10-Q  filed August 1, 2006.     |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                |            |                                                     |
| 4.1                            |            | Specimen Common Share  Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |            | Exhibit 4.1 to Form 10-Q  filed herewith.           |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                          |            |                                                     |
| 4.1a                           |            | Amended and Restated  Shareholders Rights Agreement dated December 30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                       |            | Exhibit 4.1 to Form 8-K  filed December 30, 2008.   |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                  |            |                                                     |
| 4.2                            |            | Specimen 8.70% Class B  Series II Cumulative Redeemable Preferred Shares.                                                                                                                                                                                                                                                                                                                                                                                                                          |            | Exhibit 4.2 to Form 10-Q  filed herewith.           |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |            |                                                     |
| 4.2a                           |            | Specimen Depositary Share  representing 1/10 of one share of 8.70% Class B Series II Cumulative Redeemable  Preferred Shares.                                                                                                                                                                                                                                                                                                                                                                      |            | Exhibit 4.2a to Form 10-Q  filed herewith.          |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                           |            |                                                     |
| 4.3                            |            | Deposit Agreement by and  among Associated Estates Realty Corporation and National City Bank and  Depositary Receipts.                                                                                                                                                                                                                                                                                                                                                                             |            | Exhibit 4.5 to Form 8-A  filed December 8, 2004.    |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                               |            |                                                     |
| 4.5                            |            | Form of Promissory Note and  Form of Mortgage and Security Agreement dated May 10, 1999 from AERC to The  Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                                    |            | Exhibit 4.5 to Form 10-Q  filed August 13, 1999.    |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                               |            |                                                     |
| 4.5a                           |            | Form of Promissory Note and  Form of Mortgage and Security Agreement dated September 10, 1999 from AERC to  The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                              |            | Exhibit 4.5a to Form 10-Q  filed November 12, 1999. |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                     |            |                                                     |
| 4.5b                           |            | Form of Promissory Note and  Form of Mortgage and Security Agreement dated November 18, 1999 from AERC to  The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                               |            | Exhibit 4.5b to Form 10-K  filed March 15, 2000.    |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                                         |            |                                                     |
| 4.13                           |            | Credit Agreement Dated As of  April 24, 2007 among Associated Estates Realty Corporation, as Borrower and  National City Bank as Administrative Agent, Lead Arranger, and Book Manager  and The Several Lenders From Time to Time Parties Hereto, as Lenders.                                                                                                                                                                                                                                      |            | Exhibit 4.13 to Form 10-Q  filed July 31, 2007.     |
|       |            |                                                                                                                                                                                                                                                                                                                                                                                                               |            |                                                     |
| 4.15                           |            | First Amendment to Credit  Agreement dated March 20, 2008 by and among Associated Estates Realty  Corporation (the Borrower), National City Bank and other banks and financial  institutions (the Lenders) and National City Bank (the Administrative Agent).                                                                                                                                                                                                                                      |            | Exhibit 4.15 to Form 10-Q  filed May 6, 2008.       |
|                                |            | **                                       **                                                                                                                                                                                                                                                     |            |                                                     |
| 4.16                           |            | Joinder to Subsidiary  Guaranty dated March 20, 2008 for the benefit of National City Bank, as agent  for itself and certain other lenders, with respect to a loan from the Lenders  to Associated Estates Realty Corporation.                                                                                                                                                                                                                                                                     |            | Exhibit 4.16 to Form 10-Q  filed May 6, 2008.       |
|                 |            | **                **                                                                                                                                                                                                                                                                                                                                                                                               |            |                                                     |
|                                |            | Certain of the Registrant's  assets are subject to mortgage obligations each of which individually relates  to indebtedness totaling less than 10.0% of the total assets of the  Registrant.  The Registrant hereby agrees to furnish a copy of such  agreements to the Commission upon its request.                                                                                                                                                                                          |            |                                                     |
|       |            |                                                                                                                                                                                                                                                                                                                                                                                                                              |            |                                                     |
|                                |            | The Registrant issued  unsecured debt in the form of Trust Preferred Securities on March 15, 2005 in  a private placement in an amount less than 10.0% of the total assets of the  Registrant.  The Registrant hereby agrees to furnish a copy of the Purchase  Agreement dated March 15, 2005 between Associated Estates Realty Corporation,  AERC Delaware Trust and Taberna Preferred Funding 1, Ltd. And a specimen  Preferred Securities Certificate to the Commission upon its request. |            |                                                     |
|                                |            |                                                                                                                                                                                                                                                                                                                                                                                                                                   |            |                                                     |
| 10                             |            | Associated Estates Realty  Corporation Directors' Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                      |            | Exhibit 10 to Form 10-Q  filed November 14, 1996.   |

 

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| ** **               | ** ** | ** **                                                                                                                                                                                                              | ** ** | **Filed herewith or**                                                              |
|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|
| ** **               | ** ** | ** **                                                                                                                                                                                                              | ** ** | **incorporated herein**                                                            |
| **Number**               | ** ** | **Title**                                                                                                                                                                                                               | ** ** | **by reference**                                                                   |
|                          |            |                                                                                                                     |            |                                                                                    |
| 10a                      |            | Associated Estates Realty  Corporation Directors' Deferred Compensation Plan  (January 1, 2005  Restatement).                                                                                                      |            | Exhibit 10a to Form 10-K  filed February 25, 2009.                                 |
|                          |            |                                                                                                      |            |                                                                                    |
| 10.1                     |            | Stock Option Plan.                                                                                                                                                                                                      |            | Exhibit 10.2 to Form S-11  filed September 2, 1993 (File No. 33-68276 as amended). |
|                          |            |                                                                                                                |            |                                                                                    |
| 10.2                     |            | Amended and Restated  Employment Agreement between the Company and Jeffrey I. Friedman.                                                                                                                                 |            | Exhibit 10.1 to Form 10-Q  filed May 13, 1996.                                     |
|                          |            |                                                                                            |            |                                                                                    |
| 10.3                     |            | Equity-Based Incentive  Compensation Plan.                                                                                                                                                                              |            | Exhibit 10.4 to Form 10-K  filed March 29, 1995.                                   |
|                          |            |                                                                                                                               |            |                                                                                    |
| 10.4                     |            | Form of Restricted Agreement  by and among the Company and its Independent Directors.                                                                                                                                   |            | Exhibit 10.9 to Form 10-K  filed March 28, 1996.                                   |
|                          |            |                                                                   |            |                                                                                    |
| 10.5                     |            | Form of Indemnification  Agreement.                                                                                                                                                                                     |            | Exhibit 4.2 to Form S-11  filed September 2, 1993 (File No. 33-68276 as amended).  |
|                          |            |                                                                                                 |            |                                                                                    |
| 10.6                     |            | Amended 2008 Equity-Based  Award Plan.                                                                                                                                                                                  |            | Exhibit 10.1 to Form 8-K  filed May 13, 2008.                                      |
|                          |            |                                                                                                                                                   |            |                                                                                    |
| 10.7                     |            | Amendment to Associated  Estates Realty Corporation 2008 Equity-Based Award Plan.                                                                                                                                       |            | Exhibit 10.7 to Form 10-K  filed February 25, 2009.                                |
|                          |            |                                                                                                                               |            |                                                                                    |
| 10.7a                    |            | Amendment to Associated Estates  Realty Corporation Amended and Restated Equity-Based Award Plan.                                                                                                                       |            | Exhibit 10.7a to Form 10-K  filed February 25, 2009.                               |
|                          |            |                                                                                                                     |            |                                                                                    |
| 10.7b                    |            | Associated Estates Realty  Corporation  Supplemental Executive Retirement Plan (Restated).                                                                                                                         |            | Exhibit 10.7b to Form 10-K  filed February 25, 2009.                               |
|                          |            |                                                                                                      |            |                                                                                    |
| 10.8                     |            | Form of Share Option  Agreement by and among the Company and its Independent Directors.                                                                                                                                 |            | Exhibit 10.14 to Form 10-K  filed March 30, 1993.                                  |
|                          |            |                                                                                                                     |            |                                                                                    |
| 10.10                    |            | Associated Estates Realty  Corporation Amended and Restated 2001 Equity-Based Plan (as amended on May 4,  2005).  Incorporated by reference to Appendix 1 to the Definitive Proxy  Statement filed March 28, 2005. |            | Exhibit 99.01 to Form S-8  filed May 26, 2005.                                     |
|      |            |                                                                                                                                                   |            |                                                                                    |
| 10.11                    |            | Form of Equity Award  Agreement.                                                                                                                                                                                        |            | Exhibit 10.11 to Form 10-Q  filed August 2, 2005.                                  |
|                          |            |                                                                                                                                         |            |                                                                                    |
| 10.12                    |            | Long Term Incentive  Compensation Plan.                                                                                                                                                                                 |            | Exhibit 10.12 to Form 10-Q  filed November 1, 2005.                                |
|                          |            |                                                                                                                     |            |                                                                                    |
| 10.13                    |            | Associated Estates Realty  Corporation Elective Deferred Compensation Plan.                                                                                                                                             |            | Exhibit 10.13 to Form 10-Q  filed July 31, 2007.                                   |
|                          |            |                                                                                                                                                   |            |                                                                                    |
| 10.14                    |            | Agreement of Purchase and  Sale dated August 31, 2007 between River Forest Properties, LLC, and  Associated Estates Realty Corporation.                                                                                 |            | Exhibit 10.14 to Form 10-Q  filed August 5, 2008.                                  |
|                          |            |                                                                                                                                    |            |                                                                                    |
| 10.15                    |            | Agreement of Purchase and  Sale dated August 31, 2007 between Belvedere Properties, LLC, and Associated  Estates Realty Corporation.                                                                                    |            | Exhibit 10.15 to Form 10-Q  filed August 5, 2008.                                  |
|                          |            |                                                                   |            |                                                                                    |
| 31                       |            | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                            |            | Exhibit 31 to Form 10-Q  filed herewith.                                           |
|                          |            |                                                                                                           |            |                                                                                    |
| 31.1                     |            | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act.                                                                                                                            |            | Exhibit 31.1 to Form 10-Q  filed herewith.                                         |
|                          |            |                                                                                                                     |            |                                                                                    |
| 32                       |            | Certification of Chief  Executive Officer and Chief Financial Officer Pursuant to Section 906 of the  Sarbanes Oxley Act.                                                                                               |            | Exhibit 32 to Form 10-Q  filed herewith.                                           |

 

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**SIGNATURES**

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                                                                                                  |  | ASSOCIATED ESTATES REALTY  CORPORATION                                   |
|--------------------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------|
|                  |  |                        |
|                                      |  |              |
| November 3, 2009                                                                                 |  | /s/ Lou Fatica                                                           |
| (Date)                                                                                           |  | Lou Fatica, Vice President                                               |
|                                                                                                  |  | Chief Financial Officer and  Treasurer                                   |

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