Downtown bubble seen as ready to burst.

A downtown land rush sparked by the explosive market for high-end condominiums has caused prices to jump so high that brokers and developers are concerned that the bubble could be about to burst.

Per-square-foot prices for existing buildings targeted for conversion to residential use have tripled in the last six years, and land prices have climbed nearly 50 percent.

"The pricing for vacant buildings getting up that high doesn't make much economic sense," said Eric Bender, vice president of Downtown Properties Holdings, which will finish the conversion of the Douglas Building to a 50-unit condo by the end of the year.

The action has many in the real estate community looking back more than a decade, when an influx of foreign--mostly Japanese--cash chased up the price of the market's office towers.

In the late 1980s, a booming economy sent property values to dizzying levels. Land values followed suit. The average vacant property downtown was $114 a square foot in 1989, more than double its current figure, while some properties near the financial district sold for as much as $400 a foot.

But the combination of a recession, a corporate exodus and a faltering Japanese economy hit the area hard. In 1992, the average land sale dropped nearly a third to about $78 a square foot. By 1996, that figure was $21 a foot.

But with the rebound in full effect, said one downtown broker, "It's 1989 all over again." Driving demand

Though the prospect of a bubble has not been embraced by all, there is no debate about the steepness and rapidity of the rise.

Long gone are the late '90s when developers like Tom Gilmore could snap up empty office buildings for $20 a square foot in what's now the Historic Bank District and then create a small residential neighborhood.

A combination of factors, including the adaptive reuse ordinance that encourages residential conversions and the completion of cultural and civic projects like Staples Center and Walt Disney Concert Hall, have changed the dynamic.

Late last year, a joint venture of Urban Pacific Builders LLC and West Millennium Homes bought the Brockman Building near Seventh Street and Grand Avenue for $7.5 million. At about $56 a foot, it was believed to be the highest per-square-foot figure for a historic building.

The Brockman Building's $56-a-foot figure could be eclipsed this year by the sale of the 334,000-square-foot Roosevelt Building at Seventh and Flower streets. Owner Milbank Real Estate Services was in discussions to sell that property to Lowe Enterprises Inc. for an undisclosed amount last year.

Milbank, which just purchased 660 S. Figueroa for $62.4 million, has put the Rooseveltback on the market and has received offers in the $75 to $100 a foot range, said a source familiar with the process.

"We should be able to select a buyer within two weeks," said Aaron Yashouafar, chief executive at Milbank. "We've negotiated a lot of lease terminations in case the buyer wants to do a conversion."

Kor Group is in escrow to buy the Eastern Columbia building and an adjoining 2-acre lot for close to its $24 million asking price, according to a source familiar with the deal. That works out to $60 a foot, factoring the going rate of the vacant land.

Land prices have followed suit. Overall, vacant property in greater downtown sold for more than $46 a foot last year, up from $25 a foot in 1998, according to Co-Star.

Among the recent deals is Capstone Development Corp.'s purchase of a 1.75-acre site one block east of Staples Center from Anschutz Entertainment Group for $13 million, or $170 a foot. A few blocks north, Mani Bros. Real Estate Investment Group, which bought 801 Tower at Eighth and Figueroa sweets last August, is under contract to buy the adjacent 1-acre site west of the building for between $150 and $170 a foot, according to Michael Schlesinger, the firm's chief financial officer.

Even empty buildings without the historic cachet are affected. Santa Monica-based developer Robert D'Elia is paying about $140 a foot for the 18-year-old 1100 Wilshire building west of the Harbor (110)Freeway.

"Flower Street lofts have validated the condominium market, which has now created a demand for land sites from high rise condominium developers," said Richard Plummer, senior director at Cushman & Wakefield Inc.

Meeting resistance

With the cost of vacant land or a raw building often making up 20 percent to 30 percent of total development costs, however, developers could be harder pressed to make a return on a project. With a historic building running $50 a foot, total costs could run up to $250 a foot for a residential unit.

So even while downtown condos have appreciated at a more rapid rate than housing in the rest of the county, margins will get thinner. Combine that with about 2,000 units being built in downtown annually and land and building sales may be headed for a drop.

"I think we're at a plateau," said Mark Tarczynski, first vice president at CB Richard Ellis. "But I don't think it's going to be a steep and long down leg."

Indeed, there are some distinct differences between the current run-up and that of the late '80s.

Unlike the last price boom, when Japanese firms such as Shuwa Investments Corp. went on a buying spree that brought it Arco Plaza and Chase Plaza in the mid-'80s, most of the current buyers have local roots.

With the exception of Birmingham, Ala-based Capstone, local developers such as Kor, Urban Pacific, D'Elia and the joint venture of CIM Group and Lee Group (which paid $4.5 million for the 70,000-square-foot building at Grand Avenue and 11th Street and is building 125 condominiums there) are all based in Los Angeles County.

The sellers have been long-term institutional entities whose property values have skyrocketed--even if their properties suffered from decades of neglect.

UCLA had owned the long-abandoned Grand and 11th site since 1964, while Toronto-based Terrapark Properties is selling the site west of 801 Tower after holding it for 25 years. D'Elia bought 1100 Wilshire from Format Corp., a subsidiary of Taiwan-based Formosa Plastics that had purchased the building from Great Western Bank in 1993.

Additionally, while the previous crash followed a period of almost exclusive Bunker Hill office property investment, the current surge has more life than the previous one, Plummer said, because it's driven by residential development in areas ranging from the financial district to more industrial neighborhoods to the east.

"There was no condominium development in downtown for 13 years," said Plummer. "And if we overbuild in one area (of downtown), it may not affect the other areas. It's a more balanced way to develop."