diff --git a/.changeset/olive-pugs-shave.md b/.changeset/olive-pugs-shave.md
new file mode 100644
index 0000000000..e5291c265b
--- /dev/null
+++ b/.changeset/olive-pugs-shave.md
@@ -0,0 +1,6 @@
+---
+'@shopify/cli-hydrogen': patch
+'@shopify/create-hydrogen': patch
+---
+
+Fix Hydrogen monorepo detection when the repository path contains spaces or other characters that are percent-encoded in URLs. The path is now decoded before it is used to look for the skeleton template.
diff --git a/packages/cli/src/lib/build.test.ts b/packages/cli/src/lib/build.test.ts
new file mode 100644
index 0000000000..911cdd87d1
--- /dev/null
+++ b/packages/cli/src/lib/build.test.ts
@@ -0,0 +1,52 @@
+import {describe, it, expect} from 'vitest';
+import {pathToFileURL} from 'node:url';
+import {inTemporaryDirectory, mkdir} from '@shopify/cli-kit/node/fs';
+import {joinPath} from '@shopify/cli-kit/node/path';
+import {detectHydrogenMonorepo, getMonorepoPackagesPath} from './build.js';
+
+// Mirrors the location of this file inside the monorepo, since monorepo
+// detection resolves `packages/` relative to the module that asks for it.
+const MODULE_PATH_IN_REPO = ['packages', 'cli', 'src', 'lib', 'build.ts'];
+
+function moduleUrlFor(repoRoot: string) {
+  return pathToFileURL(joinPath(repoRoot, ...MODULE_PATH_IN_REPO));
+}
+
+async function createFakeMonorepo(repoRoot: string) {
+  await mkdir(joinPath(repoRoot, ...MODULE_PATH_IN_REPO.slice(0, -1)));
+  await mkdir(joinPath(repoRoot, 'templates', 'skeleton'));
+}
+
+describe('monorepo detection', () => {
+  it('detects the monorepo when the path contains a space', async () => {
+    await inTemporaryDirectory(async (tmpDir) => {
+      // The space is what regressed: `URL.pathname` percent-encodes it, and
+      // the encoded path does not exist on disk.
+      const repoRoot = joinPath(tmpDir, 'Open Source', 'hydrogen');
+      await createFakeMonorepo(repoRoot);
+
+      expect(detectHydrogenMonorepo(moduleUrlFor(repoRoot))).toBe(true);
+      expect(getMonorepoPackagesPath(moduleUrlFor(repoRoot))).toContain(
+        'Open Source',
+      );
+    });
+  });
+
+  it('detects the monorepo when the path contains no space', async () => {
+    await inTemporaryDirectory(async (tmpDir) => {
+      const repoRoot = joinPath(tmpDir, 'hydrogen');
+      await createFakeMonorepo(repoRoot);
+
+      expect(detectHydrogenMonorepo(moduleUrlFor(repoRoot))).toBe(true);
+    });
+  });
+
+  it('does not detect a monorepo without templates/skeleton', async () => {
+    await inTemporaryDirectory(async (tmpDir) => {
+      const repoRoot = joinPath(tmpDir, 'Open Source', 'not-hydrogen');
+      await mkdir(joinPath(repoRoot, ...MODULE_PATH_IN_REPO.slice(0, -1)));
+
+      expect(detectHydrogenMonorepo(moduleUrlFor(repoRoot))).toBe(false);
+    });
+  });
+});
diff --git a/packages/cli/src/lib/build.ts b/packages/cli/src/lib/build.ts
index 6aeeb37c5d..99b1505972 100644
--- a/packages/cli/src/lib/build.ts
+++ b/packages/cli/src/lib/build.ts
@@ -5,17 +5,22 @@ import {AbortError} from '@shopify/cli-kit/node/error';
 import {dirname, joinPath} from '@shopify/cli-kit/node/path';
 import {execAsync} from './process.js';
 
-// Avoid using fileURLToPath here to prevent backslashes nightmare on Windows
-const monorepoPackagesPath = new URL('../../..', import.meta.url).pathname;
+// Resolve the `packages/` directory that contains this file.
+// Avoid using fileURLToPath here to prevent backslashes nightmare on Windows.
+// URL pathnames are percent-encoded, so decode to support directories that
+// contain spaces or other reserved characters.
+export function getMonorepoPackagesPath(moduleUrl: string | URL) {
+  return decodeURIComponent(new URL('../../..', moduleUrl).pathname);
+}
 
 // Check if we're in the Hydrogen monorepo by checking the path structure
 // This was the original logic before PR #3074 that worked for over a year
 // Check if we're in the monorepo by looking for the templates/skeleton directory
 // This works both in development and when built as npm package
-export const isHydrogenMonorepo = (() => {
+export function detectHydrogenMonorepo(moduleUrl: string | URL) {
   try {
     const skeletonPath = joinPath(
-      dirname(monorepoPackagesPath),
+      dirname(getMonorepoPackagesPath(moduleUrl)),
       'templates',
       'skeleton',
     );
@@ -25,7 +30,11 @@ export const isHydrogenMonorepo = (() => {
   } catch {
     return false;
   }
-})();
+}
+
+const monorepoPackagesPath = getMonorepoPackagesPath(import.meta.url);
+
+export const isHydrogenMonorepo = detectHydrogenMonorepo(import.meta.url);
 export const hydrogenPackagesPath = isHydrogenMonorepo
   ? monorepoPackagesPath
   : undefined;