Returns to Scale in Residential Construction: The Marginal Impact of Building Height

Abstract

We estimate the marginal cost and break-even rent of developing multifamily apartment
buildings in the 50 largest cities in the United States using a novel dataset of required
construction inputs of standardized assemblies. We find non-linearities in the marginal
cost curve at the fourth and eighth stories that directly impact a developer's returns to
scale with respect to height. This curve allows us to identify a developer's maximum
willingness to pay for land for each building height, which we then compare to existing
single-family land prices to determine whether new multifamily development will occur.
The analysis concludes by simulating the impact of height regulations on break-even
rents of new supply. We find that height regulation often has large, negative eects on
housing affordability, with increasing magnitudes for more expensive land markets.

Keywords: Regulation, Affordability, Construction Costs, Urban Economics

JEL Classification: R31, H7, L51