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

Abstract

We use engineering data on building assemblies to estimate the average and marginal costs of developing multistory apartment buildings in the 50 largest cities in the United States. The majority of housing in the least affordable cities is in multistory buildings, but most of our knowledge of how housing is produced is limited to single-family homes. By focusing on the vertical margin, we discover non-linearities in the cost curve and directly estimate the returns to scale, which allow us to measure the impact of height regulations on break-even rents of new supply. We find that height regulation has large, negative effects on affordability, with increasing magnitudes for more expensive land markets.