30 Dec Colocation Data Center: Why Businesses Are Moving Beyond the In-House Data Center

There is a reason organizations outsource services that are outside their core business. A company may need a cafeteria, for example, but operating a restaurant is unlikely to be central to its business strategy. The same principle increasingly applies to IT infrastructure.

For many organizations, operating an in-house data center requires significant investment in buildings, electrical infrastructure, cooling systems, backup power, physical security, networking, maintenance, and specialized personnel. A colocation data center provides an alternative: instead of building and operating the entire facility themselves, organizations rent data center space, power, cooling, connectivity, and related infrastructure from a specialized provider.

The appeal of colocation has grown considerably as computing requirements have become more demanding. Cloud adoption, artificial intelligence (AI), high-performance computing, digital transformation, and increasing data volumes are driving organizations to reconsider where and how they deploy IT infrastructure.

The result is a rapidly expanding global colocation industry. One recent market analysis estimates that the global data center colocation market was worth approximately $83 billion in 2025 and could reach about $218 billion by 2034, representing an annual growth rate of approximately 11.4%. North America accounted for approximately 36% of the global market in 2025.

What Is a Colocation Data Center?

A colocation data center, often called a colo, is a facility operated by a third-party provider where multiple organizations deploy their own servers, storage systems, networking equipment, and other IT infrastructure.

Rather than constructing its own data center, an organization typically leases:

• Rack or cabinet space
• Electrical power
• Cooling
• Physical security
• Internet and telecommunications connectivity
• Network cross-connects
• Backup power
• Remote hands and technical support
• Disaster recovery infrastructure

The customer retains control of its IT equipment and applications, while the colocation provider operates the physical facility and supporting infrastructure.

This model allows organizations to concentrate their capital and personnel on their core business rather than building and maintaining a specialized data center.

Why Is Colocation Data Center Demand Growing?

The modern colocation market is being driven by several forces simultaneously.

Artificial Intelligence and High-Performance Computing

AI has fundamentally changed the economics and physical requirements of data center infrastructure.

Traditional enterprise servers often operated at relatively modest rack power densities. AI infrastructure can require dramatically higher power and cooling capacity, particularly when large GPU clusters are deployed.

JLL reported in 2025 that AI was driving demand for higher rack densities and more advanced cooling technologies, while developers were increasingly investigating alternative energy sources because of power-transmission constraints.

This creates a significant challenge for organizations that operate their own facilities. Retrofitting an existing enterprise data center for high-density AI infrastructure can require major electrical and cooling upgrades.

Colocation providers, by contrast, are increasingly developing facilities specifically designed to support high-density computing.

Limited Power Availability

One of the most important changes in the data center market is that power availability has become a primary site-selection consideration.

Data center operators are competing for access to electrical capacity, transmission infrastructure, land, and permitting. In many major markets, available capacity is extremely limited.

CBRE reported that the vacancy rate in North America’s primary data center markets fell to a record-low 1.4% at the end of 2025, even as total capacity increased substantially. Power procurement, permitting, and supply constraints are limiting how quickly new capacity can come online.

For an organization needing additional capacity, securing space in an established colocation facility can therefore be considerably more practical than attempting to develop a new facility.

Key Benefits of a Colocation Data Center

Cost Efficiency

Building a private data center requires substantial capital investment in real estate, electrical systems, generators, UPS systems, cooling, fire suppression, physical security, and telecommunications infrastructure.

Colocation allows these infrastructure costs to be shared among multiple customers.

Organizations can also avoid many of the ongoing costs associated with maintaining the facility itself, allowing capital to be directed toward applications, equipment, and business initiatives.

However, colocation should not automatically be considered cheaper in every situation. Large organizations with very predictable, massive workloads may find dedicated facilities economically attractive. The financial advantage depends on power requirements, utilization, location, contract terms, connectivity, and the customer’s ability to operate infrastructure efficiently.

Scalability

One of the greatest advantages of colocation is the ability to scale infrastructure without constructing an entirely new facility.

An organization can start with a few cabinets and expand into additional racks, cages, or dedicated suites as requirements increase.

This flexibility is particularly valuable in an environment where computing requirements can change rapidly.

Connectivity and Network Ecosystems

Modern colocation is about much more than rack space.

Leading facilities often provide access to numerous telecommunications carriers, Internet service providers, cloud providers, content networks, and other customers.

This network-rich environment can make it easier to establish:

• Internet connectivity
• Private network connections
• Cloud on-ramps
• Carrier Ethernet
• Dark fiber
• Wavelength services
• Data Center Interconnects (DCI)
• Cross-connects between customers and providers

For many organizations, connectivity is one of the most important reasons to select a particular colocation facility.

The value of a data center is therefore determined not only by its building and power infrastructure, but also by its position within the broader communications ecosystem.

Reliability and Resilience

A professionally designed colocation facility typically incorporates multiple layers of redundancy for critical infrastructure.

These may include:

• Uninterruptible Power Supplies (UPS)
• Backup generators
• Multiple power distribution paths
• Redundant cooling systems
• Fire detection and suppression
• Physical security
• Environmental monitoring
• Network connectivity from multiple carriers

However, it is important not to assume that every colocation facility provides “100% uptime.” No data center can guarantee that every conceivable failure will be eliminated.

Instead, customers should evaluate the provider’s service-level agreement (SLA), redundancy architecture, maintenance procedures, historical reliability, and disaster recovery capabilities.

Disaster Recovery

Colocation can also provide an effective foundation for disaster recovery.

Organizations can deploy redundant infrastructure in geographically separated facilities, allowing critical applications and data to continue operating if a primary site becomes unavailable.

For example, an organization might maintain its primary infrastructure in one metropolitan area while replicating critical systems to a second data center several hundred miles away.

The physical separation is important. Two facilities located in the same building—or connected through the same fiber conduit—may provide less resilience than their geographic separation suggests.

Retail vs. Wholesale Colocation

The colocation market is commonly divided into retail and wholesale colocation.

Retail Colocation

Retail colocation typically involves smaller deployments, such as individual racks, cabinets, cages, or small suites.

It is well suited to:

• Small and medium-sized businesses
• Enterprises
• Managed service providers
• Network operators
• SaaS companies
• Disaster recovery deployments

Customers benefit from shared infrastructure and can scale their footprint as needed.

Wholesale Colocation

Wholesale colocation involves substantially larger deployments, often involving dedicated suites, large amounts of power, or entire buildings and campuses.

Wholesale demand has become particularly important as hyperscalers, cloud providers, and AI infrastructure operators require large blocks of power and space.

The distinction between retail and wholesale is becoming increasingly important because AI workloads are changing the scale and power density of colocation deployments.

Where Are Colocation Data Centers Being Built?

Historically, major data center markets included Northern Virginia, Silicon Valley, Chicago, Dallas, New York, London, Frankfurt, Amsterdam, Singapore, and Tokyo.

These markets remain important, but power constraints and land availability are encouraging developers to expand into secondary and emerging markets.

JLL reported that 64% of North America’s 35 GW construction pipeline at the end of 2025 was located outside traditional mature markets. Texas is emerging particularly strongly, with JLL projecting that it could overtake Virginia as the world’s largest data center market by 2030.

CBRE has similarly reported rapid growth in markets such as Atlanta, Phoenix, Dallas-Fort Worth, and other emerging locations.

This geographic expansion creates new opportunities—but it also makes network connectivity and fiber-route analysis increasingly important when selecting a facility.

Sustainability and High-Density Cooling

Sustainability remains an important consideration, but the discussion has evolved beyond traditional “green data center” concepts.

AI infrastructure is increasing power density and creating new cooling requirements. Traditional air cooling is increasingly being supplemented or replaced by technologies such as direct-to-chip liquid cooling, particularly for high-density GPU deployments.

Data center developers are also exploring renewable energy, battery storage, on-site generation, waste-heat recovery, and other strategies to manage energy consumption and improve sustainability.

JLL notes that the combination of AI demand and power constraints is encouraging data center developers to explore alternative energy solutions and more advanced cooling technologies.

For customers, this means sustainability should be evaluated alongside practical considerations such as power availability, cooling capacity, water usage, energy sourcing, and the provider’s long-term expansion plans.

Choosing a Colocation Data Center Provider

Selecting a colocation provider is a strategic decision rather than simply a real estate purchase.

Important factors include:

Location

Consider proximity to customers, employees, cloud providers, network hubs, and other facilities.

Power Availability

Confirm not only current power availability but also the provider’s ability to support future expansion.

Network Connectivity

Evaluate carriers, cloud connectivity, Internet exchanges, dark fiber, wavelength services, and other available connectivity options.

Scalability

Determine how easily you can expand from a few racks to a larger deployment.

Physical and Network Resilience

Evaluate power redundancy, cooling redundancy, network diversity, physical security, and geographic separation.

Compliance

Depending on your industry, requirements may include SOC 2, PCI DSS, HIPAA, ISO 27001, FedRAMP, or other regulatory and security frameworks.

Cooling and Rack Density

This is increasingly important for organizations deploying AI, GPU, or other high-performance computing infrastructure.

Financial and Operational Stability

A long-term colocation relationship requires confidence that the provider can continue investing in power, cooling, connectivity, security, and facility expansion.

Why Fiber Connectivity Matters

A data center may have excellent power and cooling, but its strategic value can be limited if it lacks diverse, high-quality fiber connectivity.

Organizations should investigate:

• How many fiber carriers serve the facility?
• Are fiber entrances physically diverse?
• Do separate routes use different conduits?
• Are there multiple building entrances?
• Are diverse paths actually diverse outside the facility?
• Is dark fiber available?
• Are wavelength services available?
• How easily can two geographically separated data centers be interconnected?

This is where specialized telecommunications expertise can add considerable value.

A fiber and data center consultant with access to fiber maps, network infrastructure databases, and data center mapping tools can identify facilities that meet both the IT and telecommunications requirements of an organization.

The Future of Colocation

The colocation industry is entering a new phase driven by AI, cloud computing, high-density infrastructure, and increasingly constrained power availability.

The next generation of colocation facilities will need to provide more than secure racks and redundant power. Customers increasingly require high-density power, advanced cooling, extensive fiber connectivity, cloud access, scalable capacity, and geographically diverse network connections.

For many organizations, the question is no longer whether to operate every aspect of IT infrastructure themselves. It is determining which infrastructure capabilities provide strategic value and which are better delivered by specialized providers.

A well-selected colocation data center can provide the infrastructure, connectivity, scalability, and resilience needed to support modern digital operations—without requiring an organization to build and operate an entire data center itself.

Need Help Selecting a Colocation Data Center?

Choosing the right facility requires more than identifying the nearest building with available rack space. Power, fiber connectivity, network diversity, geographic location, cloud connectivity, scalability, and future expansion capacity all need to be considered.

FiberGuide can help organizations evaluate data center locations and optical connectivity requirements, including dark fiber, wavelength services, Data Center Interconnect (DCI), and diverse fiber routes.

Contact FiberGuide to discuss your data center connectivity and infrastructure requirements and develop a solution tailored to your organization.