Market Square, a vacant parcel in the middle of Pennsylvania Avenue, will be transformed by 1989 into the centerpiece of the avenue's rebirth with high-rise office buildings, retail shops and 225 luxury condominiums, according to Henry Berliner, chairman of the Pennsylvania Avenue Development Corp.

Avenue Associates Limited Partnership, a group consisting of Western Development Corp. and seven limited partners, is developing the site.

The PADC board awarded the Market Square development rights to Western Development Corp./Avenue Associates in November 1984, and this week the partnership paid $26.1 million in cash for the property.

PADC made a $5 million profit on the sale of Market Square, the last major tract along the avenue. The land was acquired by PADC over a four-year period beginning in 1978 at a cost of $18 million, according to Al Milin, a PADC financial analyst. Interest charges pushed the total cost of the acquisition to $21 million.

The site is across the street from the National Archives between Seventh and Ninth streets NW.

The sale comes a week after PADC rejected a request from the partnership to condemn the Federal Triangle Building, located on the Northwest corner of Market Square. PADC found the building too expensive to purchase. Negotiations are continuing in an attempt to include the property in the development.

The owners say the 23-year-old office building has been appraised at $18 million.

Western officials are offering "in excess of $10 million" for the property, Berliner said.

"The owners have said they have no sentimental or historic ties to the building," Berliner said. "We have a willing seller and a willing buyer, but just no agreement on an offer."

According to partnership records filed with the PADC, the limited partners include Western executives Herbert S. Miller (41 percent), Richard L. Kramer (41 percent) and Steven A. Grigg (3.4 percent); Kan Am U.S. Ltd., a Delaware corporation of foreign investors (4.5 percent); Delon Hampton & Associates, a D.C. corporation (3.3 percent); Jeanne Clarke Harris, president of JAM, a public relations firm (3.3 percent), and Alexis Herman, chairwoman of the National Commission on Working Women (3.3 percent).

Under the agreement, the partnership will pay Western 4 percent of all the costs involved in purchasing and developing the site and 5 percent of the rental receipts. The partnership also said it will hire JAM to handle public relations and advertising for the project. Mayor Marion Barry's wife, Effi, is a JAM executive.