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

Michael Eriksen and Anthony Orlando

Real Estate Economics, 2022, vol. 50, issue 2, 534-564

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 data set of required construction inputs of standardized assemblies. We find nonlinearities 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 effects on housing affordability, with increasing magnitudes for more expensive land markets.

Date: 2022
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