The new KING of the castles
Posted by — November 27, 2009
By Joanna Pachner of the Global and MailHarvey Kalles built Toronto's leading real estate brokerage for the rich and famous. His wife, superagent Elise Kalles, brought in much of the business. Can their son Michael fill both their shoes?
It's rush hour at Harvey Kalles Real Estate. On a humid early afternoon in August, the small reception room buzzes with voices and a cacophony of ringing phones. A stream of ladies of a certain age-big sunglasses, big makeup, big designers on their labels-teeter in on high heels to pick up listing brochures, issue home-showing instructions and swap gossip before sweeping out again in clouds of expensive scent. A beefy man in a suit enters and informs the receptionist that his car is blocked. When the offending parker hears a page and rushes in, the receptionist scolds him: "You're blocking Elise."
That would be Elise Kalles, the closest thing to a celebrity agent that Toronto-and perhaps all of Canada-has. (The imposing gent is the chauffeur who ferries her to appointments in her black Lexus LS.) If you have a multimillion-dollar spread to unload in the Greater Toronto Area, or long to acquire one, the odds are that your first call will be to Elise (via one of her two assistants). She's sold two of the most expensive condominiums in Ontario. And she's the embodiment-and the most valuable asset-of the elite, carriage-trade Harvey Kalles brand.
The eponymous Harvey is Elise's husband, who founded the firm in 1957 and built it into Ontario's top independent brokerage-one of the owner-operated fiefdoms amidst the franchise empires of Re/Max, Sutton Group and others. It's a true family affair: Harvey is CEO and chairman, son Michael is the president who manages the day-to-day operations, while Elise and eldest daughter Corinne work in sales (the middle daughter isn't in the business).
The scion has been gradually taking over since the late '90s, but the turbulent market in the past year put him through his first major management test. The firm came through strongly: Kalles was the No. 1 brokerage in Toronto from January through September, eclipsing all the franchise operators. Nevertheless, the sudden market plunge highlighted a fragility in a company so reliant on the roughly 2.5% of the population that can afford a million-dollar-plus home. Michael Kalles says the company's niche has long been a boon. "There's an old expression that if people trust you to sell a home for four, five, 25 million [dollars], they'll trust you to handle a $300,000 condominium-but it doesn't work the other way around."
Still, those first-time homebuyers aren't paying the company's steep overheads. It's commissions on deals like those Elise Kalles handles that have allowed the family to stay independent while its peers were swallowed up or disappeared. As the very brokerage model is being threatened by social media that puts information and power in consumers' hands, the Kalles also face a succession challenge, and not just about who runs the firm. Real estate is a business that runs on relationships, and nowhere is that truer than in the insular, affluent pockets of major cities. As in other service industries reliant on rainmakers, it's less important who sits in the corner office than who has the ties with lucrative clients. Elise, who is today buying and selling homes for the third generation of client families, is in her 70s. As her Lexus, now freed, rolls away, it's hard not to wonder who, if anyone, can succeed her.
Michael Kalles has a cold. That's not usually a charming condition, but in the 42-year-old executive it occasions a bravura display of gracious manners. He apologizes for not shaking hands, then makes sure to hold every door so his visitor need not touch the handles. Many people, colleagues and rivals alike, comment on his charisma-not the flashy kind but more a subtle gravitational pull. "He has a remarkable ability to hold court in conversation and put anyone at ease," observes Leslie Bender, the COO who's worked for the Kalles for 28 years. In short, he'd make a great real estate agent.
He's never been an agent, however, even though he's had a realtor's licence for 24 years. But Michael grew up in the business. As a child, his father would pick him up from Sunday school and they'd drive around looking at land and homes (as Harvey's father had done before with him). When Michael got his driver's licence, he began hanging signs for salespeople, dropping off ads and baking muffins for meetings. After getting a general degree, he wanted to join the company, but his parents were against it, urging him to study something else first. He nevertheless enrolled in a realtor training program, then did an MBA at York University in development, followed by a related post-MBA diploma.
In 1994, the fresh graduate showed up for work, hoping to start as an agent, but, with the company's sales manager off ill, he instead took over the job of overseeing the people who did the deals. The industry was in the depths of the longest real estate downturn on record, and the company was facing a stark choice: go much smaller, go much bigger, or go under. "We were in a no-man's land," Michael explains. With 37 agents, the firm was too big to manage as a niche boutique, and too small to enjoy critical mass. Because a brokerage's fixed expenses grow only marginally as business volume rises, the company either had to quickly generate more top-line revenue-the portion of the sale commission the brokerage keeps-by hiring more, and more productive, agents, or shrink by two-thirds.
The lease was coming up on the Kalles' old office. Michael had always admired a three-storey building in North Toronto that was close to the key neighbourhoods the brokerage serviced. When, in 1995, he saw a For Sale sign, he insisted the company buy it. He and his mother loved it, his father was completely against it. Harvey thought it was the wrong time, the wrong market, and he was congenitally averse to debt. Then one night, over a dinner, he changed his mind. "This was the turning point," says Michael. "You can't buy 13,000 square feet and not go big."
The timing proved perfect. While everyone else was retrenching, Michael spearheaded an international marketing push by signing partnerships with global organizations such as Christie's Great Estates, and computerized the office. These investments helped attract top agents, and as the market rebounded, the brokerage's fortunes rose with it. By 1996, the firm had tripled its sales force and revenues from just two years earlier.
The strengthened operation was better able to withstand the onslaught of name-brand corporate players, which had adopted the franchise model and were growing at a rapid pace. Agents, especially good ones, liked the franchise pitch: Instead of handing over half their commissions to the brokerage, they just paid a fixed fee and bought signs and other materials from Royal LePage or Re/Max. To hold on to their best salespeople, independents had to trim their shares of the commissions. Many couldn't hold out. Kalles fought back by boosting the value-add for agents. The brokerage invested in glossy marketing materials and launched a magazine. In recent years, the firm has also expanded its online presence, ensuring that every agent has a website, which gets updated centrally. Since the mid-'90s, says Michael, investments in infrastructure have doubled the firm's costs, but have also grown transaction volume fivefold, to about $1.2 billion today, and retained the company's dominance in its niche.
The firm, along with the entire industry, thrived through the past decade as real estate became a national obsession. A cooling-off was inevitable, but what happened in the fall of 2008 was a shock. In September, the real estate market in the GTA "fell off a cliff," says Michael. "The downturn we suffered from September to January was the worst we've ever had in terms of a decrease from where we were to where we went." Through the fall and winter, says agent Diane Litchen, a 12-year veteran of the Kalles brokerage, "you couldn't sell a house to your grandmother." Reading about market crashes, bank failures and housing foreclosures, everyone just sat on their money, and this was especially true among the affluent. "It was significantly more a rich person's recession, because so many people have been hit in their investment portfolio," says James Burtnick, a broker with Sotheby's International Realty Canada.
There was palpable fear around the Kalles office. Salespeople used to closing half a dozen deals in a month were doing none. "The marketplace was missing buyers in every price point," says Michael. Unable to reduce fixed expenses quickly, and not wanting to alarm the agents, the firm opted, in Michael's words, "to grin and bear it." The company's avoidance of debt gave it some breathing room. Michael met with staff from sunrise to sunset, reassuring them that the firm and the sales would bounce back. "Michael was always positive, stressing that the market is cyclical," recalls Litchen. "He brought in experts who'd talk about the market and the economy." But the boss was deeply worried. "I didn't know when consumer confidence would come back," he says.
After a few dead months, the market perked up in March, then roared ahead in the spring. The brokerage did 200 deals in June, the best single month in the company's history, "which was shocking to everyone," says Michael, "including myself." The four blackboards in the Kalles office hallway where deals are marked were completely covered, and the staff were jotting down transactions on the windows of the office across the hall. The continuing strong sales since then have kept everyone busy-none more than Elise, who personally hardly noticed the slowdown that pummelled everyone else's sales.
One of Elise Kalles's assistants has been giving me updates on her boss's progress from her latest appointment, and finds me outside to announce that Elise is in the building. The mystique surrounding this woman who has sold more luxury residences than anyone in the country makes me anticipate an imposing presence, two cellphones going at once as she barks instructions to aides trailing behind her. Instead, a small, elegant and slightly stooped woman walks in, warmly shakes my hand, and asks, "Have you had lunch? We should be giving you lunch!"
If Harvey is the scrappy founder and builder and Michael the smooth operator and manager, then Elise is the soul and main revenue engine of this company. She's the one who organizes the parties and picks out gifts for the staff, but she's also the one rustling up the big cheques. Asked about the best business decision he'd ever made, Harvey doesn't hesitate: persuading his wife to take out her real estate licence. The first time they went to the licensing office, she changed her mind at the door. A few years later, she finally went in. And a star was born.
As he tells this story seated in the office boardroom, Harvey Kalles has the faraway look of someone watching a memory unreel in his mind. But that passes quickly, and he's back to being the focused dealmaker, a guy who loves to swap stories of big scores and close misses. He bought land in Mississauga when it was literally farmland. "Those [purchases] turned out to be very lucrative," he says, a smile underlining the extent of his understatement. He still owns industrial buildings that throw off income. (Aside from the residential brokerage, the Kalles have a commercial brokerage, a property development arm and a mortgage operation, which Harvey has increasingly focused on as Michael took over the main business.)
When Harvey opened his brokerage in 1957, he leaned in part on connections his father, a wholesale fruit merchant, had among wealthy grocers, such as the Loblaw brass. In 1973, Elise sold the company's first high-end home for $1 million, an unheard-of price then. Deciding that "it was the same amount of work selling a $50,000 house as a house for $1,050,000," the family decided to "farm" the ultra-tony Bridle Path neighbourhood. Harvey also figured the high end was more stable: There are always rich people, even during poor times. The family, still living in a middle-class home, began moving among the "billies" (Harvey's term for billionaires). The Kalles had for some time been involved in philanthropic causes, and now it became important for business to shake the right hands at fundraisers and charity balls. Elise had charm and warmth, but the Holocaust survivor also had tenacity and sangfroid in negotiations.
Plus, she's a relentless worker. The day I meet her, she's been up since 7 a.m. "talking to Europe about an offer." She's handling the sale of Eb Zeidler's house-"you know, the architect?" She's also selling Cardinal Carter's former home. We decide to talk in the car on her way to her next appointment. The right back seat is outfitted with a table and phones, and as we sip iced coffees her driver has fetched, she shows me brochures for her current properties. One is the Eatons' mansion in Caledon Hills, listed for $20 million. It's magnificent, she trills, piling on superlatives as she describes the guest house, the indoor pool, the ballroom and, oh, look at the gardens! Houses in this price range are marketed internationally, through affiliates such as Christie's and the Board of Regents, as there are few people in the world who could afford this place as a second home.
As we drive leisurely through the uptown Bridle Path neighbourhood, consisting of about 80 spectacular houses on two-acre lots or more, she points out her past inventory: "I sold that one. ...I sold that one. ... I sold that one twice." Over there is the home she sold to (The Artist Formerly Known As) Prince for $5.5 million, and here, spread over four acres, financier Robert Campeau's former home. More than 95% of her business is referral, and her card gets passed down the generations. We pause in front of a mansion that exemplifies how she builds her business: In the last few years, she explains, she sold a bungalow in the Bridal Path to clients who tore it down and built this house. The people who had lived in that bungalow in turn bought a luxury nearby condo through her. They didn't use it for three years, and she kept calling to see if they wanted to sell. In late July, they agreed, and she sold it the first day it was listed, to someone she had waiting for just such a property. Meanwhile, the people who built this house have now engaged her to sell it. As for the condo couple, they're moving out of town. "I trust when they come back and they need a pied-à-terre, they'll call me."
Investing in relationships is the core principle of real estate sales. The Kalles even handle home leases, on which they lose money, because it introduces the company to potential future buyers. And while the average price tag of Elise's properties is $3.5 million, the brokerage's average is around $1 million. That's still 2 1/2 times the Toronto Real Estate Board average in September, but not the elite stratosphere the Kalles brand has come to imply. Some Kalles agents, in fact, specialize in the lower end of the market, and one of the firm's top performers has never sold a house over $600,000.
The Kalles need to embrace the middle class for other reasons. For one, properties under $750,000 represent more than 90% of the GTA housing stock. As well, the lower end is more liquid these days. "The mom and dad and kids [market] is more affected by mortgage rates [than the stock market]," says Richard Silver, an agent with Bosley Real Estate, another family-run brokerage in Toronto, "and that middle range of $500,000 to $1.5 million is still very, very busy."
Another reason the Kalles need all the clients they can get is that the Internet is transforming the relationship between agents and homebuyers. Michael Kalles estimates that nine out of 10 prospective buyers research homes online at some point, mainly on the realtor-operated Multiple Listing Service. Back in 1996, when some MLS data was put online for the public, "the fear was that if we opened all this information we've been controlling, buyers will buy directly from the Internet," he says. "We haven't seen that. Buying a home is not like buying an airline seat." Homeowners still want professional help in navigating the legal and negotiating hurdles involved in real estate transactions. "If the business was going to be taken over by the Internet, it'd have been by now."
James McKellar, academic director of the real estate and infrastructure program at York University's Schulich School of Business, thinks Kalles is significantly underplaying the threat. "Any process in which there are so many intermediaries is subject to technological change," he says. "These people are brokering information, and technology is going to erode their ability to control it." From websites and social media-which let people advertise their properties-to Google's Street View feature that enables buyers to explore homes and neighbourhoods by simply typing in addresses, consumers are gaining more and more power over the process. "It's like going to Ikea," says McKellar. "If you can do some of the work yourself, you'll save money." The spread of brokerages that offer access to MLS listings and a few other basic services for a flat fee may be the vanguard of an industry metamorphosis. Mitch Joel, president of Montreal digital marketing company Twist Image, points to the growing popularity of fee-based websites abroad that list properties and supply the required legal documents, the surge in housing listings on eBay, and the "augmented reality" feature on the new iPhone that Europeans are quickly adopting for house browsing: Just point the phone at a home you drive by to find out if it's for sale, who represents it, and do a video tour of the inside. "His industry is changing, whether he wants to acknowledge it or not," says Joel.
Nevertheless, the shift toward consumers handling more of the purchase or sale workload will likely erode agents' ability to demand 5% of the purchase price, the standard commission that hasn't changed much over the years. "Brokers are petrified that someone will challenge that 5% fee," says McKellar. "How many other parts of the business world can say, our fees never change? It's like some sort of secret society."
Though Michael waves off concerns about technology's impact, it's hard to believe this brainy MBA who led the company's outreach to a global market and onto the Web doesn't have some worries. But his dad has the business values of a different generation-he disparages credit, hardly uses a computer and seems to view the franchise system as an uncivilized abomination-and he's still the CEO.
The transition from dad to son has been gradual and fluid. Asked when he became president, Michael can't remember the year, though he does remember the day when he took over signing the cheques. "Dad never said, 'I'm going to step back from this now,' " he says. "I just took on different jobs."
And even in this exceptionally close family where the parents and kids all live in the same neighbourhood, dine together every Friday, and share most holidays and vacations, father and son have a special bond. "In the 15 years I've worked hand in hand with my dad, we've literally had not a single cross word," says Michael.
But Michael intensely feels the pressure to grow what his dad built. He knows the statistics that show 75% of family businesses fail after the first-generation handover; of the remaining quarter, 90% fail in the third generation. From the Eatons to the Aspers, there is no shortage of high-profile examples of children squandering their parents' legacies. "It certainly weighs heavy on me," he says. He's less concerned about using it to make his own name. "Every day that I work in this business, I put my own stamp on it," he says.
Yet while Harvey's name is on the door, it's Elise's name that carries the most weight. "The mother is a very important driving force," says McKellar, who knows the family. "She is the firm." When she retires, it may not be easy for the brokerage to retain her clients. "She is the kingpin of that organization, and the relationships are based on her. How do you transfer those? You can't transfer them to Michael," because he doesn't work in sales.
Elise is bringing more of the firm's agents in on her deals and forging links for them with her contacts. She's also encouraging Corinne to work more closely with her, but her daughter isn't keen. "I don't want anything to come in the way of our relationship," says Corinne. As for Michael, he tersely dismisses the idea of his mom's retirement. "She's more energetic than she's ever been," he insists, as if even admitting advancing years were disloyal. Yet succession and estate planning, as any adviser will tell you, are at core about confronting unpleasant realities so you can prepare for their impact. The business his father dominated will change dramatically during Michael's reign. His mom will eventually not be part of it. And familial superstition and courteous deference to parental sensitivities will not solve those challenges.
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