Cohen & Steers, an asset manager specializing in real estate, predicts that U.S. REITs will boost dividends by 10% a year for the next five years.

The sunny outlook, which cites a recovery in cash flows, comes in spite of the continued woes of many segments of the U.S. housing markets and the sluggish economic recovery.

Because commercial real estate is improving, the broader real estate sector is recovering and the outlook is positive, said Jon Cheigh, portfolio manager of the Cohen & Steers U.S. Realty Total Return Fund.

Indeed, real estate has bested other asset classes since 2009. The U.S. Real Estate Securities Index racked up gains of 10.2% in the year to June 30, compared with gains of 6% for U.S. stocks.

In both 2010 and 2009, the U.S. Real Estate Securities Index climbed 28% while U.S. stocks gained 15.1% in 2010 and 26.5% in 2009. The Global Real Estate Securities Index beat global stocks in those time periods.

Cheigh explained in a press briefing earlier this week that this apparent disconnect is a result of differing supply-and-demand dynamics for residential real estate and commercial real estate. “The recovery is spurred by a low level of supply [of commercial real estate],” he said, pointing out that new U.S. construction is at a multi-generational low.

According to Cohen & Steers, the levels of new construction since 2009 have been below 1%, less than half of the 25-year average of 2.1%.  Further, the supply of commercial real estate overall is near a two-decade low.

The supply is so low partly because new projects haven’t made sense with the delicate U.S. recovery, he said, and partly because not enough banks and investors want to put their capital towards new construction.

However, he did say much of the damage in the first six months after the collapse of Lehman Brothers in 2008 has been reversed, and banks are now willing to lend for investors to buy commercial properties, if not to finance new construction. “There’s more capital, cash flows are rising and there’s a meaningful appreciation of real estate asset values,” he said.

The extremely limited supply, coupled with stabilization of the economy and growth in demand, has resulted in a recovery for the sector. “We see recovery of cash flows in the U.S., we see real estate companies raising dividends, and we expect U.S. REITs to raise dividends 10% a year for the next five years,” he said.

He added that in spite of dramatic falls in housing prices in markets including Las Vegas and Arizona, not all U.S. housing has fallen so far. “Real estate is a local market,” he said. In fact, the shaky state of the housing market has helped the apartment sector, which has seen occupancy rates climb.

He added that REIT performance has been strong in a variety of inflationary scenarios historically, notching positive returns in 10 of 14 inflation regimes. He said, “So long as the reason for an increase in interest rates relates to an improving economy, REITs will do better, especially in more inflationary scenarios."