Closings reflect broader challenges for retailers affected by low home sales and slowing residential construction
Elwood Logistics Center in Goodyear, Arizona, was one of Home Depot’s 10 largest U.S. distribution centers before it was listed for sublease in September. (John Williams/CoStar)Since the end of August, at least three large distribution centers operated by Home Depot have been put back on the market for lease, all in properties that the home improvement retailer had occupied for less than three years.
So far, the largest facility to hit the market is a 1.3 million-square-foot warehouse built in 2020 in the West Valley of Phoenix. The home improvement retailer originally leased the entire building in late 2021 but has now listed it for sublease through 2031. Locally owned by its developer, Tratt Properties, the building offers best-in-class amenities typically only available in the most modern distribution centers, including 40-foot ceiling heights, a 190-foot truck court and more than 230 loading docks.
In a similar move, Home Depot also put a 1.1 million-square-foot distribution facility in the Inland Empire up for sublease through 2029. Home Depot had occupied the facility since it opened shortly after completing construction in 2022. Meanwhile, EQT Exeter recently listed 772,000 square feet available for direct lease northeast of Atlanta in a 2007-built distribution center that Home Depot first leased in late 2021.
Including another large Home Depot distribution center south of Chicago that was listed for lease last February, the home improvement retailer has pulled out of at least 4 million square feet of warehouse space since the beginning of 2024. That amounts to 4% of the roughly 112 million square feet worth of warehouse space occupied by Home Depot and its subsidiaries, according to the company’s 2023 annual report.
The closings signal that the world’s largest home improvement retailer is following through on plans to cut costs by $500 million, which its Chief Financial Officer Richard McPhail announced in June 2023 at the company’s annual investor and analyst conference.
While announcing the initiative, McPhail explained, “We flexed our supply chain holding capacity up to absorb unplanned growth in 2020 and 2021. And we are now gradually reducing that holding capacity as transactions normalize.”
McPhail also noted that the cost cutting was expected to be fully realized in Home Depot’s fiscal year 2024, which ends in late January 2025.
Home Depot is one of many retailers being negatively affected by the recent run of higher interest rates, which resulted in mortgage loans averaging over 5% since April 2022, sinking U.S. home sales to lows not seen since the aftermath of the Great Financial Crisis, and also raising financing costs for home renovation projects.
During Home Depot’s second-quarter 2024 earnings call, Home Depot Executive Vice President of Merchandising Billy Bastek noted, “Big-ticket comp transactions, or those over $1,000, were down 5.8% compared to the second quarter of last year. We continued to see softer engagement in larger discretionary projects where customers typically use financing to fund the project such as kitchen and bath remodels.”
Higher mortgage rates have also reduced new residential construction. The number of single-family housing units under construction nationwide is down 29% since mid-2022, according to the Census Bureau.
With fewer homes changing hands, sales of home goods, furniture, appliances and building materials have been among the weakest-performing categories of otherwise healthy U.S. retail spending. A range of businesses in these sectors, including HomeGoods, Wayfair, Daltile and Shaw Industries, have also closed large U.S. distribution centers since mid-2023.
There are clear risks of similar warehouse closings by firms in this sector in the months ahead. However, the Federal Reserve’s 50 basis point reduction in the Federal Funds Rate on Sept. 18 may prove to be an early signal of an eventual pickup in home sales and spending on goods such as furniture and appliances.
In response to decelerating inflation and anticipated interest rate cuts by the Federal Reserve, the average interest rate of 30-year fixed-rate mortgages has already fallen by 170 basis points from a peak of 7.8% in October 2023, according to Freddie Mac. Further reductions could pave the way for home sales to make a slow but steady rebound in 2025.