The original Lincoln Square, however, hit many speed bumps along the way. In fact, the dot-com bust threatened to stop the project for good, before Kemper Development took it over in the early 2000s.
Last week, the Washington chapter of real estate industry group NAIOP gave a peek behind the curtain about everything that went wrong with the original Lincoln Square project, which was one of the biggest in North America at that time, and what happened to put it back on the right path.
Important players in the Lincoln Square project also shared what they learned from the dot-com era, and how that period compares to today’s tech boom.
In the late 1990s, Vancouver-based developer Ian Gillespie’s firm Westbank Projects Corp. and international developer Lend Lease started planning the $360 million project, which was then set to include a 27-story office tower and a 42-story tower with condos above a hotel. Both towers were planned to sit above 330,000 square feet of specialty retail including restaurants, a 12-screen movie theater and 60,000-square-foot health club.
Though Gillespie didn’t have much experience with office projects, hotels or projects of such scale, he was, by all accounts, doing well in the lead-up to construction. His company had secured a big lease with Drugstore.com for the office building, made a deal for the hotel to operate under the Westin flag and found someone to buy the hotel when it was done. And he had managed to pre-sell a decent chunk of condos. Lend Lease became the lead developer in 2000 around the time construction started.
Across the street, Kemper Development, the owner of the Bellevue Square mall, was watching. The new project would be a competitor, but it also had the potential to lift up the neighborhood and surrounding businesses.
“The last thing we need is for someone to lay an egg at our front door,” said Jim Melby, president of Kemper Development and one of the speakers at the event.
But timing victimized the project.
Developers were building as fast as they could to accommodate tech companies growing at a rapid pace. Many of these companies didn’t live up to their optimistic promises, including Drugstore, which was never able to recapture the same stock market value after going public in 1999.
New office buildings in Seattle, Bellevue and all around the U.S. opened, but there were few tenants around to pay the rent. The percentage of vacant office space locally shot up from around 3 percent to 27 percent over a nine month period.
“The expectations far outpaced where the reality was and unfortunately building to that kind of an uncertainty did result in this big implosion,” said Richard Leider, who was with Lend Lease at the time and later started his own firm Trinity Real Estate.
Lincoln Square wasn’t without problems of its own. The go-go pace of the dot-com boom led the team to try to do the massive project under a single building permit, rather than doing it in phases which would reduce the risk if something went wrong. A lot of key details in the plans were never really finalized, and consultants had consistently told the team that the mall-like retail setup was going to be a tough sell.
Lend Lease brought in Leider to manage the project at the local level in the summer of 2001. Melby compared the timing to being named the captain of the Titanic when the ship was 100 yards away from the iceberg.
In the midst of all this came the terrorist attacks of Sept. 11, 2001, making it even harder to get such an ambitious project done. A few months later in 2002, Leider was sitting in traffic in downtown Bellevue on his way home on the phone with Lend Lease executives in Atlanta, telling them they needed to stop the project and tie up all the loose ends before things really got out of control.
Leider called up Melby and Kemper Freeman Jr., and asked if they would meet with Lend Lease executives. The two sides went to dinner at Daniel’s Broiler, a steakhouse on the 21st floor of Freeman’s Bellevue Place complex, which overlooks the Lincoln Square site. Lend Lease asked Kemper Development to take a look at the project and give feedback, specifically on the retail. For the Kemper Development executives, who didn’t have any sort of concrete agenda for the dinner, the meeting was eye opening.
“I remember all the sudden realizing these guys are in trouble,” Melby said.
That evening changed the project. It later went to auction, where Kemper Development was outbid by Opus Northwest. But Opus couldn’t make the project work either, and Kemper Development soon after scooped up the land and stalled project in 2003 for $40 million. Kemper Development had the advantage of time stemming from the dinner with Lend Lease the previous year, so they had already come up with a plan to make the project viable. The main changes involved redoing the retail design to make it face out to the sidewalk and simplifying the parking garage.
Though some lack of attention to details had a part in shutting down the project, and Kemper Development’s preparation played a big role in getting it started again, luck and circumstance were important as well.
In 2003, Melby and his team were in Las Vegas at the International Council of Shopping Centers‘ annual convention trying to find retail tenants, and they struck up a conversation with Eddie Bauer. Talks about putting a store in Lincoln Square eventually escalated to Eddie Bauer leasing space in the office tower.
“I said ‘that’s awesome, when you guys finish bankruptcy call me,'” Melby recalled telling Eddie Bauer executives at the time. Eddie Bauer eventually emerged from bankruptcy and followed through to become the first big company in the office building. A year later, Microsoft stepped in and took the remainder of the office space.
These big deals helped insulate Lincoln Square from the downturn of the Great Recession. That allowed Kemper Development to begin planning and eventually build out the expansion of Lincoln Square.
Leider and Melby compared the frothy environment of the dot-com era to the tech boom of today. Both of these times were driven by a trend that started in the late 1990s away from suburban offices and moves into the city. One of the big problems of the dot-com era was traditional investors were starting to act like venture capitalists, making numerous bets with the acknowledgement that some could fail. But that didn’t play well in the real estate world, which thrives on certainty, and if a bet goes wrong, the project is lost and so are many jobs. Melby said many of those investors have learned their lesson and are sticking to what they do best.
“In our business you can’t take that kind of lotto ticket approach to investing or tenant selection and who you go into business with,” Melby said. “Do what you are good at, and it works out pretty well.”
While there are parallels between today’s tech boom and the dot-com era, Leider and Melby said most players involved have learned their lessons. The companies themselves are growing, but in smarter ways. The investors, landlords and lenders learned that while a great story from a company is important, in the end, they still have to be able to pay the rent.