I think until more is known about Empire's moddability/capabilities, it would be better to continue work on M2. However, you guys are in control of the mod, not us fans, so if you want to just get the demo out and then commit to planning for Empire I'm sure the fans won't quibble.

I do have to say naval combat could be extremely interesting with the weird and wonderful ships (and beasties) of the Old World. Cover/environmental tactics is also great, and the "duel"-style combat between officers could be pretty awesome. Imagine a Chaos Champion duking it out with an Imperial Count, or an Orc Warboss battling a Dwarf Lord...