Regulation appears to be part of the answer, as suggested by Arnold Kling, drawing upon research by Edward L. Glaeser, Joseph Gyourko, and Raven Saks, here is the original paper. The authors estimate that one-half the cost of constructing a Manhattan apartment is due to regulatory barriers and related inefficiencies.
And how much does a Manhattan apartment cost? Well, one estimate says the mean value is now $916,959, and the median value is $575,000, caveat emptor on these numbers but we all know it isn’t cheap.
As an aside, both the authors of the study and Steven Landsburg pose an interesting question. Why are not all buildings in a city block of the same height, given that their owners presumably face common costs and returns? The study authors cite regulatory factors, Landsburg cites non-convex building costs and diversity of demand.