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Construction of the Lloyd Blocks is under way, and it’s going to be a whirlwind.

“It’s going to go fast,” said Kyle Andersen, a principal at GBD Architects and the project’s architect of record. “We’re going three levels down before we come back up and then there will be three cranes in the air.”

On Sept. 17, American Assets Trust – a San Diego-based real estate investment trust – will hold a formal ground-breaking ceremony for its massive mixed-use development planned for the Lloyd District superblock between Northeast Multnomah and Holladay streets, and Seventh and Ninth avenues. By that time, construction will be four weeks into a project slated to finish in summer 2015.

Many people hope that the project, announced by former Portland mayor Sam Adams in spring 2012, will catalyze development in an area lagging behind expectations. Meanwhile, some observers question whether the market will support a $192 million (American Assets Trust’s total estimated investment) venture.

Robert Barton, executive vice president and chief financial officer for American Assets Trust, is confident it will. In an email, he said company officials foresee a major transformation in the Lloyd District that will turn it into a vibrant work, live and play environment.

Barton said that before American Assets Trust settled on its Lloyd Blocks project, it sought to acquire multifamily properties throughout the Portland market – including in the Pearl District. Record low vacancies and demographic trends attracted the company’s attention, but most of the properties it found were selling at cap rates below 5 percent – not high enough to boost shareholder value.

Then the company found the Lloyd District, and a fully entitled site on the doorstep of mass transit, the Rose Quarter and downtown Portland. American Assets in 2011 purchased its Lloyd District portfolio – four contiguous superblocks and six office buildings – for $92 million, with the proceeds from its initial public offering. Barton said the properties have produced a cash return of more than 8.5 percent since acquisition.

The challenge will be to create an active, pedestrian-focused environment presently dominated by cars and mass transit vehicles.

“In my mind this is a great project for any part of the city,” Andersen said. “To put this project in the Lloyd District is an unprecedented move that’s really going to help that area.”

In 2002, the Portland Development Commission adopted a strategy that envisioned adding 3,000 housing units in the Lloyd District by 2015. Today, there are approximately 1,000.

American Assets Trust is planning to build 657 residential units, 47,000 square feet of retail space and more than 1,200 underground parking stalls beneath three buildings. One will be 21 stories tall, one will be six stories, and another will be five.

A big focus will be the street level, where GBD has crafted meandering walkways and plazas to help nourish the pedestrian experience. The design also looks to break down the massive block by extending Northeast Hassalo Street and Northeast Eighth Avenue through it.

Andersen said a Leadership in Energy and Design platinum rating is being targeted for the entire development, which will feature an above-ground cistern that prominently displays water levels at different times of the year, as well as a living machine that recycles gray and black water.

Meanwhile, many observers are crossing their fingers that it all goes according to plan.

“The problem that the Lloyd District has always struggled with is it’s not a pedestrian-oriented neighborhood,” said Robert Black, vice president of multifamily investment sales at NAI Norris, Beggs & Simpson. “It’s not a neighborhood that supports a 24-hour sort of lifestyle. So with what these guys are proposing, that will hopefully stimulate it … It’s a valiant effort. I love to see what they’re doing, but then there’s the daunting side of it – of absorbing that many residential units. I don’t know what they’re trying to lease them at, but I think that will be the challenge.”

American Assets Trust hasn’t disclosed specific rents yet, but Barton said they would be priced according to size, location and amenities, and be affordable for the target market. For now, Black said two nearby barometers are the 202-unit Axcess 15, and the 185-unit Merrick Apartments.

The Axcess 15, built in 1990, was purchased last year by a private equity firm out of Chicago for $48.63 million. Trammell Crow built the Merrick Apartments in 2003 for approximately $20 million. Units in each property rent for between $1.60 and $2 per square foot. The Lloyd Blocks’ development cost is substantially higher, so rents might need to be as well.

“So we’ll see if that is sustainable when you punch in that many units,” Black said. “I can’t imagine making their deal work at $1.75 (per square foot). I mean they need at least $2.”

One thing in American Assets Trust’s favor, however, is that as a REIT it has access to cheap money and lots of it. As of June 30, the company had $60 million of cash on its balance sheet, as well as an untouched $250 million line of credit that can expand up to $400 million.

Barton said the company also has the ability to raise approximately $125 million in new equity, and/or leverage the unencumbered superblock site itself. In addition, American Assets Trust has 5.8 million square feet of real estate assets in its portfolio that it could tap into and sell at any time to raise additional capital.

Garry Warren, executive director of the 264-unit Calaroga Terrace, a senior living facility on Northeast Second Avenue, said the new residential units will be a welcome addition to the neighborhood. Currently, the area is something of a ghost town after 5 p.m.

“What you’re going to start seeing now is a lot of other development will follow,” he said. “There are a lot of things in the works out here … everyone has just been kind of waiting.”

Numerous nearby projects are on tap. At 300 N.E. Multnomah St., Rembold Cos. is preparing to develop a six-story apartment building with 179 units. The Red Lion on Northeast Grand Avenue is planning a $10 million renovation, and a headquarters hotel project is being discussed.

Mike Wells, managing director of CBRE‘s Portland office, said the Lloyd Blocks project holds a lot of promise for the neighborhood. He also questioned what rents would be, but didn’t think the development would struggle to fill up. Sam Rodriguez, managing director of Mill Creek Residential Trust‘s Portland office, expressed similar sentiments.

“I think it’s an incredibly pioneering project that will no doubt be a catalyst for that neighborhood,” he said.