GlobeSt.com EXCLUSIVE: Kemper Development Pushing Ahead with Lincoln Square Office

BELLEVUE, WA-Kemper Development is moving ahead with the 500,000-sf office component of its massive Lincoln Square project. The locally based company’s namesake Kemper Freeman tells GlobeSt.com his personal goal is to have the office tower topped out and clad when the rest of the 1.4-million-sf mixed-use development opens in November. “I’m being a little aggressive here but we can, in fact, do it,” says Freeman. “We’ll need to be going in the next several weeks.”The company has been fully deployed just getting the first four phases of Lincoln Square running. But with everything going smoothly, Freeman says it’s the perfect time to shift focus to the office building. He says most of the cost risk for the office tower has already been incurred–the parking is built and the columns and footings are in place because they had to come up through the underground parking garage and three-level retail podium on which the office tower will sit.”With the necessary permits in hand, the steel already purchased and contractor still on site, we can save millions of dollars by moving right ahead with the final phase,” he says. Bolstering his confidence is the rapidly tightening office market–current predictions are that Downtown vacancy will be between 4% and 6% by year’s end, down from 21% as recently as June 2004 –and the strong interest he’s received from space users, enough to fill half of the building. “Without a conscious effort we have had office users approach us and say ‘we have decided we are going to locate in your building, when will it be ready?’” says Freeman, who expects the early interest will translate into lease agreements for about one-third of the building. “That’s not a bad start, and once people know we are really moving forward… .”Located at the corner of Northeast 8th Street and Bellevue Way, Lincoln Square consists of a 2,000-slip underground parking garage topped by a three-story, 300,000-sf retail podium that, in turn, is being topped by two opposing towers: the 27-story office building and a 42-story building with a 337-room Westin on the lower floors and 148 luxury condominiums on the upper floors. A syndicate of banks led by Bank of America and US Bank have provided $220 million in construction financing for the first four phases and the New York State Teachers Retirement System have made a $128-million forward commitment for a 10-year permanent financing that will pay off the portion not covered by the sale of the condominiums. Connecticut General Life Insurance Co., a subsidiary of Hartford-based Cigna Corp., recently bought a $33-million equity stake in the project.The project got under way in 2000 and was halted in mid-2002 after the dot-com meltdown and the ensuing recession shook the project–and the Downtown office market–to its core. The developer at that time was a group of investors led by Lend Lease Real Estate Investments’ Value Enhancement Fund IV. When Kemper Development purchased the stalled development in August 2003, he acquired not only the land, about 1,700 below-grade parking spaces and a half-completed hotel-condominium tower, but also the steel for the office building, which had been pre-purchased. “We bought at old steel prices, not the new ones,” he says. “It’d be millions more now.” Don’t expect a below-market deal, though. Freeman says he has informed those expressing interest in leasing office space that it won’t be lowering their real estate costs. “I told them ‘if you’re looking for rent relief, look elsewhere’,” says Kemper. “And many have responded ‘it’s not about rent; our particular company needs a high-energy environment and a high service level for its employees.’”Kemper says the hotel is coming along nicely and the condominiums have sold out at per-sf prices ranging from $400 to $1,000. “The earlier developer had luck with younger professional people buying smaller units on the lower floors–people without kids, maybe or maybe not married,” he says. “By the time we got involved, the other market showed up, the empty nesters who have nice homes on the lake and can sell those and buy as nice a condo as they want and still have money left for a place in Sun Valley.”The empty nesters bought from the top down and the young professionals bought from the bottom up, meeting in the middle of the building very quickly, he says. As for why his sold out and while other high-end product has been slower to sell off, Kemper says it is because it is in the heart of the city and surrounded by restaurants, shopping, parks, and the arts. “My research guy calls it the ‘walkabout factor’,” says Freeman. “It’s about what’s there when you come down out of the elevator and walk about.”The take-up on the retail has been strong as well. As of early February, one-third of the retail space was preleased and negotiations were under way for much of the remaining space. Kemper announced two new tenants in January: Parlor Billiards & Spirits, a 21,000-sf upscale pool hall, and an 8,000-sf, two-level McCormick & Schmicks seafood restaurant. In November, Signature Theaters Management Co. of San Ramon, CA leased 77,436 sf for a 16-screen movie theater. Lincoln Square is part of a four-block area owned almost entirely by Kemper Development. Across Bellevue Way from Lincoln Square is Kemper’s one-million-sf Bellevue Square mall. Across Northeast 8th Avenue from Lincoln Square is Bellevue Place, Kemper’s 500,000-sf office and retail development that wraps around the Hyatt Regency Bellevue. “We’ve got about four million sf along about one-half mile of Bellevue Way where we’re looking back and forth at each other,” says Freeman. “We’re getting a really super street scene that has made sales at our shopping center increase dramatically.”Looking ahead, Freeman has many adjacent parcels with which to further penetrate that demographic and thereby add to his stranglehold on the market. “We’re at about 40% of total build out,” he says. “We’d be under construction on the expansion of Bellevue Place right now if Lincoln Square didn’t take our attention.”Indeed, Freeman says Kemper Development next will refocus on the expansion of Bellevue Place. First on the list is a doubling in size of the Hyatt hotel there. Construction is scheduled to begin in the middle of 2006. And after Bellevue Place could come the redevelopment of a two-block property across from Bellevue Square between Northeast 4th and 6th streets that is similar in size to the Lincoln Square property. Kemper Development is in the process of obtaining the site from Safeway in exchange for a two-block site between Northeast 4th and 2nd streets. Kemper says Safeway plans to develop a flagship urban 24-hour store on the site it is getting. On the site Kemper Development is getting, Freeman isn’t yet saying, but you can bet it will be upscale in nature and include a goodly portion of retail. “We’re building everything here especially for the Eastside demographic,” says Freeman. “With Microsoft and all the affluence that has come in here–educated and a little younger–this is about as perfect a demographic for grade retail stores as you could have in America.”