Hello everyone, and welcome to our fourth episode of Risk Playbook. I'm Mike Mitchell, Vice Chairman of Graham Company, and today I'm joined by Carl Dranoff, President and CEO of Dranoff Properties.

An innovator and a trailblazer in the real estate development industry, Carl is nationally known and widely respected for his work over the last fifty years, which has been dedicated to building back and reimagining American cities. Throughout his career, he has contributed to the transformation of urban zip codes across the country, including Chicago, Milwaukee, Baltimore, Pittsburgh, St. Paul and Newark.

In particular, Carl's efforts in his hometown of Philadelphia have helped Center City grow eight times what it was when he first started, becoming the second largest downtown after Midtown Manhattan. Carl founded Dranoff Properties in 1997, after serving as the president of Historic Landmarks for Living. Carl, it's an honor to have you as my guest on Risk Playbook.

Pleasure to be here.

You've had a great run—it's not over—and I always like to start these conversations with how you got started. You certainly have a passion for the real estate development industry and my sources tell me it all started at a young age, even maybe at a time when you had an Erector Set. And some people may not know what an Erector Set is, but I certainly do. I wasn't very good at it. So, tell me about the passion and how you got started at such a young age?

I think Erector Sets were a forerunner of Legos. When I was growing up, we had LINCOLN LOGS and Erector Sets and other building toys. And then my father got me an HO (scale) train set when I was about nine or ten years old, and I just loved putting together the wiring, the tracks, creating my own little city with the trains and house models. It was fascinating to be able to do that kind of urban planning when you were a ten-year-old. I think I got that passion, and it never went away. I always wanted to build my own buildings and my own cities, as a grown up from what I learned as a child.

You started out in residential real estate, and you stayed there. I believe it started out back in the day, when, I'll say pre-1986 tax law changes, where there was a lot of tax benefits associated with some of that residential real estate development, right?

Yes. I really got my urban chops from the very early 80s when I got involved in a firm that was just a fledgling company of two or three people that was reconstructing tiny, little historic buildings. I was lucky because in 1981, the Economic Recovery Tax Act passed under the Reagan administration. This was a period when all kinds of new incentives were being added to our economy, and the government enacted this program that gave a tax credit to historic buildings that were rebuilt. We were starting at that point, and we got this extra incentive.

So, we expanded our operations, began doing larger buildings, and before we knew it, after three years, we had done over fifty buildings in Philadelphia and started going out into other cities throughout the East Coast and Midwest. We ended up by 1988, becoming the largest rehabbers of historic buildings in the United States. It was really a great ride.

Unfortunately, what the government giveth, the government can taketh away. In 1986, they did not repeal but reduced the benefits of historic construction from a 25% tax credit to 20%. They also changed the tax laws that restricted the amount of people who could invest in these types of limited partnerships. So, our development playbook went from 100 miles an hour to about 10 miles an hour over a two-year timespan. Our work stopped by 1990.

It always fascinates me that people like you and other entrepreneurs, you know—life throws you curveballs, your business all of a sudden is not what it once was, and somehow, someway, you reimagine and rethink and continue on in many cases in bigger, better ways.

So, you go out on your own. You're a visionary, you're an entrepreneur, you're a risk taker. When you started, I'm assuming you didn't have the balance sheet perhaps that your company has today, and you're competing against the big boys. Your philosophy, I believe, correct me if I'm wrong, is you like to be independent. You want to have the flexibility of making your own decisions. How did you get started in the business in that environment?

Mike, my entire real estate career rests on being a contrarian. I would always go where others fear to tread, starting new projects in either undiscovered, undesirable or distressed neighborhoods and cities. Now, if I had a pension fund partner, or an institutional partner, like an insurance company, they would probably say “no.”

But because I was a contrarian, and I didn't have a big balance sheet—my father was a dry cleaner, I grew up in a row home in Northeast Philadelphia—it was a blue-collar neighborhood. Fortunately, my parents gave me a great education, and I took that and ran with it.

But because I was a contrarian, I was always able to go into these new neighborhoods and pick up land at low prices and figure out a way to get land and buildings and assemblages to enable me to operate at a low cost. And because I'm an engineer myself, and I have a business degree, I was able to put that together with a small staff really. As most entrepreneurs do, they start small, and if they have something good, it grows.

In addition to being a contrarian, I’m resilient—and boundless energy. And yes, life throws you curveballs and you just have to push back and keep going forward.

Just for our audience’s sake, Carl, you have your engineering degree from Drexel University in Philadelphia and your MBA from Harvard Business School. You put the two of those together, along with an entrepreneurial mindset to get started and there’s certainly risk involved in starting out. It's great that you have that background of, started with nothing and means you don't have a lot to lose when you when you start, I guess.

That’s true.

But in addition to being a contrarian, I've also heard you say that if you follow the pack, you'll always be behind the curve. So there again, it goes to constantly changing and adapting, right?

That's right. Real estate is particularly a cyclical industry. Real estate cycles tend to be very long, and they tend to have major corrections. For example, back in the 1980s—we had hyperinflation at the beginning of the 80s, under Jimmy Carter and the beginning of the Reagan administration. If you were in real estate, your borrowing costs ballooned up. That created big problems for real estate operators. Then, in the late 80s, we had a major recession in the United States. Many government agencies were created to deal with distressed real estate, particularly with the S&Ls being taken over by the Federal Deposit Insurance Corporation (FDIC) in the late 80s and early 90s. So that was another major liquidity crisis for real estate.

Then we had the dot-com crisis of the late 90s, early 2000s. Then we had 9/11, where liquidity dried up, and we didn't know which end was up for at least six to twelve months. Then we had the great recession of 2008 through 2011. Then we had COVID-19.

So, it seems like every six to ten years, there's a correction, and real estate always is at the front end of that and normally has the steepest decline—and also the quickest recovery. So, if you are resilient, and you can steer your ship, and get through those crisis periods, you're typically poised for a great growth spurt on the way up.

This is Risk Playbook, and we're talking a lot about risk here. And as you progress through your business career here, you have taken on much bigger projects in terms of size and scope. And with those bigger projects, I'm sure there's that much more risk. How do you go about managing the risk associated with these larger, complicated projects?

Well, I'm a very hands-on guy, and I like to stay in control of my projects. Real estate projects, the bigger they are, the harder they can fall if things go off track. You can suffer from cost overruns, you can suffer from refinancing risks and higher interest rates. And so, one thing I learned the hard way was “stay liquid.” Hold on to whatever cash you have. Because if you don't, you're not going to be ready for the next crisis.

Second thing, be small. Yes, grow your company, but stay nimble. Always make sure that the right hand knows what the left hand is doing, because coordination is very critical, and being able to turn on a dime.

I can give you many examples of that, but one stands out: In 2008, when the big real estate recession hit, the condo market was very shaky for a while. We had several projects that were coming out of the ground or nearly finished, that were condo projects. We quickly were able to turn them both into rental projects. In one of the projects, three of the units had already been sold and conveyed, and I had to actually buy them back from the owners in order to continue to convert that building into a rental.

So having liquidity in tough periods is very, very important. Being nimble, being able to turn on a dime, very, very important. Coordinating what you're doing. Staying in control of your construction. Walking around.

I follow the Sam Walton theory of management, if you've ever read his book, which is “management by walking around,” and there's no substitute for that, you can't dial it in. Even during COVID 19, when everybody else was virtual, we had no choice. With my largest project coming out of the ground 47 stories, we had no choice but to be on site every day.

In my business, we insure a lot of construction companies. I'm sure making sure you're partnered with the right kind of contractor that can do the work on time, on schedule, on budget. That goes a long way too, I would think?

Mike that goes part and parcel with being nimble. When you have great partners, and they're loyal and they perform well throughout the years for you, you stick with them, and they become part of your company.

A good example of that is your firm, Graham Company. You've been insuring my buildings for, I don't know, 25 plus years, and we know we can count on you. We know we can get the best pricing, we don't have to shop around and worry. We can concentrate on our day-to-day business.

Our contractor, INTECH Construction, they do a great job for us. They've built about 80% of my projects. I know that they're honest, hardworking, and they always come through for me. So, we tend to use them over and over again. That's fewer construction executives that I have to carry on my staff supervising other construction companies.

It goes on and on. With your legal staff, with your designers, with your marketing and advertising executives, firms that you do business with, if you have a quasi-staff that is outsourced, and you have great companies and partners that you're working with, it allows you to concentrate on what you're really good at, and stay nimble.

Carl, first of all, thank you for the compliments as it relates to our company. The pleasure is ours—we're proud to have you as a long-term customer.

But you know, some of what you just said makes me think of what I know of you in terms of your leadership skills and your leadership style. I'm going to rattle off a few comments here and you tell me if I'm right. And if I'm right, where did this come from, and how has it translated into success for your business?

I hear—and I know—you're demanding. You chase perfection. You're fair. You appreciate hard work and a good job. You're loyal—you mentioned that. You're the hardest worker in the building. You're not asking somebody to do something that you don't do yourself. Is that an accurate depiction of who you are?

I think so. I think that I would characterize myself as a workhorse, not a show horse. When I'm on site, I’m picking up lint, I am doing everything that I see that I would want anyone else to do, and I try to lead by example.

So, part of that is treating people the right way. I mean, that's the way I would want to be treated. I had other bosses in my career before I started Dranoff Properties, and it's amazing how cavalier some of these so-called leaders were in the way they did business and the way they treated people.

Yes, I am demanding. In fact, the logo for our company for a long time was Dranoff Properties: pride, perfection, persistence. And you can't get that way, and you can't build great buildings without high quality control. It just goes with what we do. It's in our DNA. We have to be demanding of ourselves to produce great buildings and to manage them well, and to produce a product that people expect and to have a brand name.

So yes, “demanding” is part of that, but treating people the right way, leadership by example, management by walking around, great coordination, having fun, building great buildings and celebrating our great buildings with our staff. These are all things that provide great pride among our staff, and I don't have to motivate them. They're self-motivated.

Well, what you're describing—when you're talking about being demanding, appreciative and having respect—you're talking about the best coaches in sports history. You're talking about the best mentors in a business environment. You have that and that's the reason that you have such a strong following and have been so successful.

Let me get back to risk for a second—I believe in the early stages, you were primarily rental properties. And then at one point, you converted—you mentioned this a little bit—but you converted to condominiums. Condominiums are a much higher risk profile. Am I right? And if so, why do that conversion? Was the reward, perhaps, greater? Or was it the challenge associated with it? What drove that?

What drove that was simple a business strategy: We’re really good at providing high-end, quality housing. When we focused on apartments in the earlier part of my career, I learned over the years and the decades that many of my customers eventually bought homes and bought condos, and I was losing those customers. I wanted to figure out a way to sort of be double breasted and be able to not only rent apartments, but also sell homes so that I could keep that customer. That was really my motivation to doing both.

We still do both. Our first condo actually was not until 2008. We actually started designing that building, which was Symphony House, in 2003. It took five years to get through purchasing the ground, designing the building, building the building, moving people in, and then completing it—that’s a five-year span. And at the end of that five years, started converting what was going to be condos into rentals because of market conditions.

Being able to go both ways gave me a tremendous latitude, but my playbook stayed the same, which is to produce high quality housing. And we were able to do that in both the sales environment and the rental environment. Even today, as we build our tallest condominium on South Broad Street—Arthaus, 47 stories—we're still planning rental properties, because we want to go both ways and be able to have our customers stay with Dranoff Properties.

That’s a good segue for me, because I am shocked to see apartments and condos going up in every major city. We're two years into COVID when everybody left, and I thought, you know, nobody wants to go up in an elevator anymore with people they don't know, restaurants are closed, there's nothing to do in the city, theaters are closed.

As a result, who's going to be moving into the city? The people that work there aren't even going into their offices. And yet there continued to be development. It's just been a quandary for me, and I'm probably missing something! But how did that happen?

If you think about urbanization, and you think about long term trends, versus short term disruptions, people have been moving back into cities for six centuries. And it's been predicted that 80% of the people worldwide will live in cities within the next fifty years—and right now, that's about 50%.

The reason is that cities provide opportunities for people. Cities are gathering spots. People can collaborate and be innovative, and that is showing itself today in the great research centers that we have in the cities. Just take Philadelphia, for example: The hospitals, the universities, the life sciences, the pharmaceutical companies, biotechnology companies—they are the growth engine of our city right now. These are just fledgling industries, and they require people to collaborate. So, you can't just dial in a lab. It takes a lot of people to run a lab and they have to be together. Cities are in our futures.

Also, look at the attractions that cities have. It's where our museums are. It's where our stadiums are. It's where people go for entertainment, for restaurants, to enjoy a great performance at the opera. These things are not changing. I think that the evolution of cities is a case in point that will continue.

I would call that a trend—a trend that continues. And the fact is, we are as poised for growth now as we've ever been in the cities. The fact that we have spiking gas prices as we speak that are going to five and $6 a gallon only makes the case for walkability more enticing. So, I'm very comfortable being in the city, being in the close-in suburbs, being near technology, creativity and mainly walkability. This is something that is going to be more and more prevalent in the coming years.

That's what makes you an entrepreneur—you have the vision, you have the belief, you have the stomach to believe that it's coming back, despite all the COVID fallout and whatnot. Fortunately, there's people like you that can invest in the future and I tell you what, it's coming back that for sure to stadiums are now open, and everything's good to go.

But Mike, even though we believe so heavily in the cities, that doesn't mean that we have not modified our business, and we have not looked at things that may be changing over the long term. 

For example, COVID-19 has ushered in a brand new age of “office at home.” And even if 90% of our office space is eventually reoccupied, that means 10% isn’t. That 10% is people staying at home and having jobs that are more mobile, that allow them to work from home. So, all of our new housing has some either communal or individual, in the home, office area. 

We have seen the evolution during COVID-19 of houses becoming not just places to live, but an office space, a restaurant where you're ordering in instead of going out, a place for staycations, a place for daycare. So, in our new housing products—even though they are urban for the most part—we still look at trends. 

And the one thing that has emanated from COVID-19 is housing demand is still just completely unfulfilled. There's a bigger demand now than there's ever been for housing. Housing will probably have to be more dense, not less, in order to maintain the pricing and maintain affordability, which is getting to be more and more of an issue in America. So, we have to be cognizant of that.

But at the end of the day, people want to live in their home with great finishes, great details, wonderful layouts, lots of light and energy efficiency—and that's not going to change. But the way people use their homes will change.

Well, you hit on all those markets. I've seen your properties. And we'll get to the one that's underway right now in a minute. But in 2018, you decide you're going to sell your entire apartment building portfolio to Aimco, a Denver-based real estate investment company. What prompted that, Carl?

A few things. Number one, we were getting bigger and bigger. Our management—property management staff was getting bigger and bigger. I felt like we were getting, actually, too big. I felt like we were focused more on managing our buildings and developing new buildings, and I really wanted to get back to my entrepreneurial beginnings, where I was exclusively a developer—I didn't have to worry about the day to day management, and running a staff and really trying to be excellent in an area means that you have to make major investments. And I wanted to make my investments more in the development end, and building new products, than I did in managing them.

So, the sale to Aimco fit perfectly in those crosshairs, because it gave me a capital base to start new projects, and it relieved me of the necessity of managing existing ones. This enabled me to really do even larger projects, and actually recharge my batteries for a new generation of new buildings.

When somebody goes through a transaction like that the thought is, “Alright, he's cashing his chips in.” And then what does he do? He puts all the chips back on the table—and you have a project right now by the name of Arthaus on Broad Street in Philadelphia, 47 stories, you mentioned it. It's already getting architectural acclaim and rave reviews in the architectural community. You hired a world-renowned architect. Wow. I mean, what made you say, “I'm putting my chips back out there?”

Some people would say that I doubled down, and maybe I did. But really what I was trying to create is a game changing project for the Avenue of the Arts. When I start in neighborhoods, I like to start with a single building and then stay close, stay nimble, be able to walk to the new projects. Between 2008 and 2014, we had completed three projects within a few blocks of Arthaus. They were all stunning projects, and I wanted to build a building that would be a game changer—that would be an icon to the Avenue of the Arts. That had to be a very tall building. It had to have a trophy architect with just tremendous design features and amenities and features that could be found no place else, maybe in North America. 

So, maybe this is kind of a legacy project for Dranoff Properties. But it took me three years to assemble the site, another two years to design the building, and now three years to build it. We're just finishing Arthaus, and it is expected to be completed in June of this year, 2022. I think it will be a never to be replicated, iconic, game changing project that will bring not only the Avenue of the Arts greater acclaim, but the whole city of Philadelphia.

Well, Carl, I had the opportunity to walk through that building with a personal tour by you, and it is an incredible building. For my audience, if you have the opportunity to see it, you should. It's a trophy building, and Carl, congratulations—I'm sure it will be a major part of your already great legacy. Good luck with the remainder of that project.

Thank you, Mike.

Let me just close with a final question here, as we wrap up. You've talked about the real estate disruption over the years: the Tax Reform Act of ‘86, the great recession, 9/11, Dot-com bubble, etc. And now, you touched on it, the changes in the way people work and live. So, when you look into the future, what do you see for the real estate industry?

At the top of the list, the one thing that has remained just in huge demand, and probably always will be, is a place to live. People still want and need a place to live, whether it be a rental property, whether it be a condo, whether it be high rise, low rise, mid rise, suburb, city.

We're seeing just tremendous surges in pricing and costs, and it's driving the price of housing up. We’re adapting to that. We're probably going to see more dense development to be able to push costs down and to maintain affordability. We're going to see perhaps better finishes, better layouts, better details in smaller spaces. We're going to see home offices. We're going to see more electrified car charging in your home.

So, we're adapting to a changing environment, but we see a bright future for housing and for cities, close-in suburbs—and we think that their real estate business is still a wonderful place. One of the last places by the way, where entrepreneurs can still start with virtually nothing, operate out of their pickup truck, build something small, or renovate something small, and grow your company and really be a huge success if you stick to it and don't get distracted.

Carl, I think that's a great way to wrap up. Thank you so much for joining me today. And as always, thank you to our listeners for tuning in. To our listeners who want to get in touch with Carl or learn more about Dranoff Properties, please visit DranoffProperties.com.

Until next time, I'm Mike Mitchell, and this is Risk Playbook.