Have 1M sf to fill? Home Depot can help

Move over Amazon.com, Home Depot is the new belle of the ball for industrial developers.

The Atlanta-based chain, among other home improvement and construction retailers, is absorbing millions of square feet of warehouse space, as it moves to adjust its supply chain and have more goods in storage. And the company has become an attractive tenant for industrial developers, including Prologis, Duke Realty and Clarion Partners.

In Los Angeles and the Inland Empire alone, Home Depot has signed more than 4.5 million square feet worth of industrial leases so far this year, according to public property records reviewed by TRD.

“It speaks to more consumption, more need for floor space and a supply chain issue,” said CBRE’s Daniel de la Paz. “That extra inventory and getting out of just in-time delivery is important.”

In 2019, about 30 percent of deals signed for more than 1 million square feet were signed by home improvement retailers, like Home Depot and Lowe’s, according to de la Paz. Today, the majority is going to home improvement, more so than e-commerce or logistics firms.

These deals are signed for an average of 10 years, suggesting these retailers are committed to the space for the long term — an upside for developers.

With a market cap of $319 billion and about 2,300 retail stores, Home Depot is by far the largest home improvement retailer. Lowe’s, another popular chain, has a market cap of $133 billion and about 1,970 stores.

Home Depot declined to comment for this story.

In 2017, Home Depot outlined a five-year goal to spend $1.2 billion to open 150 new buildings by 2022 in an effort to increase its home delivery capabilities. When the pandemic hit, this goal was even more necessary as sales surged, rising 14.4 percent in 2021 compared to 2020 to reach $151 billion, according to financial filings. With the increase in sales, the firm needs more inventory — and a place to store it.

“Our intent is to build the fastest, most efficient and reliable delivery network in home improvement, reaching 90 percent of households with a same-day, next-day service on big and bulky,” Home Depot CFO Richard McPhail said on a recent earnings call.

While it has fallen short of meeting its goal of opening 150 distribution hubs, the company is expecting to have 85 open by the end of the year. McPhail has cited the pandemic and the company’s $8 billion acquisition of HD Supply as cost hindrances to the company’s goal.

But it’s not stopping with the 85 new facilities.

In Los Angeles, the company recently signed a lease to occupy a 530,000-square-foot facility in Irwindale, a property owned by Duke Realty that is set to be completed this year.

Home Depot also signed a lease in April to take a 1.1 million-square-foot building in the Inland Empire city of Ontario — a building that does not even exist yet. Clarion Partners is developing the property as part of its larger plan for an industrial center on approximately 86 acres between Euclid Avenue, Eucalyptus Avenue and Merrill Avenue.

And 1.1 million square feet in Ontario wasn’t enough. The same month, Home Depot signed a lease to take up two buildings under development by Prologis in Ontario, memorandums of the leases filed with the county show. The two buildings are set to be 1.5 million square feet each, according to the city of Ontario.

The two Inland Empire properties won’t be finished for months, if not at least a year. But Home Depot, like other industrial tenants right now, knows it has to get into space quickly, given vacancy is at all-time lows.

In the Inland Empire, vacancy was virtually non-existent in the second quarter at about 0.4 percent, according to JLL.

Pre-leases, like the ones Home Depot signed with Prologis and Clarion Partners, currently make up the majority of industrial deals in the Inland Empire market.

“They can all see in real time how quickly space comes online and then disappears,” De la Paz said. “It’s a game of musical chairs.”

Home Depot isn’t the only home improvement retailer signing deals, but no others have signed deals for more than 1 million square feet in the Inland Empire or L.A.

In Phoenix, a growing industrial market, Lowe’s signed a deal in January to take a 1.1 million-square-foot warehouse in Mesa, which it will use for distribution.