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Michael and Harvey Kalles
Michael and Harvey Kalles

Report on Small Business magazine

The new king of the castles Add to ...

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.

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