Environmental factors such as the availability of oxygen are instructive cues that regulate stem cell maintenance and differentiation. We used a genetically encoded biosensor to monitor the hypoxic state of neural cells in the larval brain of Drosophila. The biosensor reveals brain compartment and cell-type specific levels of hypoxia. The values correlate with differential tracheolation that is observed throughout development between the central brain and the optic lobe. Neural stem cells in both compartments show the strongest hypoxia response while intermediate progenitors, neurons and glial cells reveal weaker responses. We demonstrate that the distance between a cell and the next closest tracheole is a good predictor of the hypoxic state of that cell. Our study indicates that oxygen availability appears to be the major factor controlling the hypoxia response in the developing Drosophila brain and that cell intrinsic and cell-type specific factors contribute to modulate the response in an unexpected manner.