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

49 Pages Posted: 1 Oct 2020 Last revised: 1 May 2021

See all articles by Michael D. Eriksen

Michael D. Eriksen

University of Cincinnati - Department of Finance - Real Estate

Anthony W. Orlando

California State Polytechnic University, Pomona - Finance, Real Estate and Law Department

Date Written: April 12, 2021

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 e ects on
housing affordability, with increasing magnitudes for more expensive land markets.

Keywords: Regulation, Affordability, Construction Costs, Urban Economics

JEL Classification: R31, H7, L51

Suggested Citation

Eriksen, Michael D. and Orlando, Anthony W., Returns to Scale in Residential Construction: The Marginal Impact of Building Height (April 12, 2021). Available at SSRN: https://ssrn.com/abstract=3674181 or http://dx.doi.org/10.2139/ssrn.3674181

Michael D. Eriksen (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Anthony W. Orlando

California State Polytechnic University, Pomona - Finance, Real Estate and Law Department ( email )

United States

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