iHeartMedia to cut U.S. real estate footprint in half
iHeartMedia is cutting its office square footage by half across the U.S. The company does not plan to close offices in any of the 160 markets where it has a presence.
The company declined to share how much office space it currently pays for or a timeline for when this process will be completed. An iHeartMedia spokesperson said the reduction began as early as 2019.
A “huge portion” of the media and internet companies tracked by Craig Huber, media analyst and founder of research and advisory firm Huber Research Partners, has reduced their real estate footprint to save on costs in the past two years, he said. Many are getting out of leases or subleasing excess real estate.
While overall real estate costs at iHeartMedia have declined with a reduced real estate footprint, “much” of this money is being reallocated to hire more people, to develop more projects and build out technology at iHeartMedia, said iHeartMedia CEO Bob Pittman. “It’s a reallocation of expenses to where we will get our growth,” he said.
Pittman declined to share how much money these changes will save the company overall. iHeartMedia had $63 million of free cash flow in the third quarter, and “when including the proceeds from real estate sales” its adjusted free cash flow was $70 million, said Rich Bressler, iHeartMedia president, COO and CFO, in a Q3 company earnings call.
iHeartMedia’s revenue in Q3 was $989 million, up 7% year-over-year. Consolidated adjusted EBITDA was $252 million last quarter, an increase of 10% year-over-year. The company has around 10,000 employees.
“For organizations that have a growing remote workforce with employees spread across the U.S., cutting back on real estate is a very valid strategy. Downsizing office space will save the organization money that can be invested in other areas of the business including the workforce,” Terri McClements, PwC’s senior partner and DEI consulting leader, said in an email. In a recent PwC study, real estate professionals said 10-20% of office real estate may need to be removed or repurposed next year.
Office changes to encourage collaboration
Real estate is “certainly a place that [management teams] are looking at to save costs… as a lot of people are embracing the hybrid work model” Huber said. The downside of this process is the impact it may have on company culture.
However, the changes at iHeartMedia are an effort to improve culture and collaboration, Pittman said.
The philosophy at the company, Pittman explained, is that the office should be a “productivity tool and should be used when we need collaboration, ideation and culture building.” Meanwhile, individual tasks like answering emails can often be done effectively from home, he said.
All live studios and recording studios in New York City have moved into the same building as iHeartMedia’s corporate offices, for example.
“The enemies of collaboration are walls and siloed locations. The more we can mix together the people who work together by location within an office, the more naturally the collaboration comes and the more freely new ideas will flow,” Pittman said.
The process of reconfiguring iHeartMedia’s office space began before the pandemic, moving to an open plan with fewer individual offices and more meeting rooms. When the pandemic hit, “we increased the pace of these office design changes, because with this new work environment it’s clear that we needed to make the offices reflect the needs of our employees, and old [and] traditional office design hampered them as opposed to helped them,” Pittman said.
Meeting rooms also host teleconferences, Pittman said – which has become the way teams often communicate between people working from the office and those at home. While many employees don’t have a permanent office space because they are not coming in everyday, there is enough space for all employees when they do come into the office, Pittman said.
iHeartMedia does not have a “one-size fits all policy” when it comes to its work model, he said, depending on the needs of the employees and the projects they’re working on. Some weeks an employee may need to come in every day to work with their team, and some weeks they may not need to come in at all, Pittman said.
Real estate activity slowing in uncertain economic climate
The share of real estate costs on a company’s overall operational budget varies significantly at different companies, Huber said. The largest expense is labor, which on average makes up over 60% of a typical company’s cost base, he said. Rental agreements can account for an average of up to 5% of a large company’s total operating budget, such as in the case of Fortune 500 companies, said Marisha Clinton, senior director of Northeast regional research at real estate company Savills.
Warner Bros Discovery, BuzzFeed and Dotdash Meredith have subleased hundreds of thousands of square feet in Manhattan this year. Vox Media is reorganizing its office space to “reprogram” unused space, a company spokesperson said in September. However, leasing activity has slowed this quarter, Clinton said. Savills closed on 16 leasing deals in Manhattan over 100,000 square feet in the third quarter. This quarter there have only been two deals so far, down from 12 deals in Q4 2021, she said.
“Given the uncertainty that we’re facing in the economy, there’s definitely more of a wait-and-see approach… to real estate decisions,” Clinton said.
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