Innovation Geographies 2024

The San Francisco Bay Area remains at the forefront of global innovation by a significant margin, outperforming most on venture capital, R&D investment, productivity and talent breadth. Beijing, Boston, Tokyo, London, Seoul, Singapore, Shanghai, New York and Paris all rounded out the pool of global leading hubs when factoring in both innovation output and talent concentration, as was the case in previous years.

Notably, Singapore and Shanghai improved even more on their already strong showings within this elite grouping. At the same time, the continued migration of talent, manufacturing and economic and corporate activity has pushed Austin into the realm of “global builders”, joining Los Angeles, Munich, San Diego, Shenzhen, Tel Aviv and Toronto.

Despite the increasing competition for talent and challenges relating to costs of housing and doing business, “global leaders” remain distinguished by access to critical capital and funding as well as the breadth and depth of skilled workers. It will be critical for innovation-related firms to maintain – and in some cases expand – their footholds in these cities in order to realise the benefits of such structural advantages that are unlikely to be replicated elsewhere.

Driving much of this market maturation and development of increasingly specialized clusters has been an injection of capital into newer technologies, eroding the previous dominance of traditional tech segments and companies. Leading this has been generative AI, which received US$22.3 billion in venture capital funding in 2023, along with growth in electric mobility, batteries, space tech, green buildings, hydrogen, challenger banks, drug development and synthetic biology to bring new innovation funding to US$54.7 billion throughout the year, more than doubling since 2020.

Notably, the San Francisco Bay Area is dominant for AI deployment, having received nearly US$49 billion in funding for AI and related technologies over the past three years, more than Beijing and New York combined. Just as important as emerging technologies are to site selection for corporate expansion and investment, so too is the digitization of traditional industries. Most prominently seen in the venture capital sphere by the rise of challenger banks, fintech and insurance tech are radically overhauling finance and insurance and opening up new growth streams.

Alternative sectors will also be critical in enabling many of the fastest-growing innovation geographies, particularly those in Asia and the United States, to cope with the disproportionate burden of the effects of climate change on real estate investment. For instance, estimates from S&P suggest that 63% of the increase in the operational costs for data centers will come from extreme heat and a further 17% from drought. In recognition of this, venture capital funding for green building technologies rose by 32% in 2023, faster than even the alternative innovation sector average of 29%.

The geography of innovation is further being shaped by external geopolitical forces. More aggressive trade and industrial policy in the United States, the European Union and China, among other players, is incentivizing onshoring and domestic production of critical components at levels not seen in decades. Although this has been most notable in terms of semiconductor manufacturing, evidenced by the CHIPS Act in the United States, it is also coming in the form of legislation such as the European Union’s Net-Zero Industry Act.

Over the long-term, this realignment will place additional emphasis on in-house research and development, as well as co-location with manufacturing firms’ access to transportation and logistics nodes. Phoenix, Columbus, Fukuoka and Berlin are just some of the cities with multi-billion-dollar semiconductor or high-tech materials fabrication plants being built in or near their metropolitan areas due to these policies.

Cities across the globe are grappling with the challenges posed by an ever-greater share of the built environment risking obsolescence in terms of both meeting not only newer occupier and investor requirements, but also those posed by more stringent efficiency and sustainability standards. At the same time, the intensifying pace of urbanization is placing additional pressure on public authorities to increase the scale and longer-term planning to accommodate future growth in a more holistic and environmentally focused manner.

Innovation anchors are and will continue to be vital to the success of these initiatives. In recent years, they have been at the core of highly localized economies of scale with outsized prominence at the global and regional levels. Precincts such as Tech Central in Sydney, the Jurong Innovation District in Singapore, Schuylkill Yards in Philadelphia and ID in Manchester exemplify the ability of innovation to catalyze multi-faceted regeneration. Importantly, these comprize cross-sector investment in housing, office, lab space, research incubators, medical and diagnostic facilities and manufacturing and production hubs, all tied together with consideration towards improved amenitization, green space and infrastructure provisions.

The sustained importance of innovation as an economic force and driver of real estate demand poses a number of strategic implications and considerations on both the private and public sectors if they are to harness the benefits of demographic shifts, property requirements and new technologies to drive change.
 

• Occupiers and investors alike will need to further diversify their footprints and portfolios to account for the unprecedented geographic distribution of skilled talent and hotspots for innovation-led growth.

  
  

• The importance of co-location between institutions, corporates, talent and requisite infrastructure will necessitate strategy that focuses increasingly on submarket and micromarket performance rather than solely at the city level.

  
  

• A rapidly evolving innovation ecosystem is also leading to more responsive and fluctuating real estate dynamics. Tenants and owners will have to become more attuned to pricing sensitivities to avoid missing out on higher returns on investment.

  
  

• Public authorities, corporate occupiers and real estate investors will need to step up proactive collaboration so that innovation-anchored regeneration is done through an integrated, sustainable and cohesive approach.