What is a colocation data center?

How colocation works

The Congressional Research Service draws the line by ownership. A large company may build, own and run its own on-premises data center, called an enterprise data center[3]. Organizations without the room, staff or IT resources for that rent space, equipment or services in a colocation data center, sometimes called a managed data center, owned and operated by someone else[3]. Leases vary widely in size: CBRE tracks asking rates both for requirements of 250 to 500 kilowatts and for deployments of 10 megawatts or more[1].

Interconnection is the other thing colocation sells. Equinix describes its business in terms of digital infrastructure, a data center footprint and interconnected ecosystems[2], and Digital Realty offers data center, colocation and interconnection solutions[4].

Colocation vs. enterprise, cloud and hyperscale

The categories overlap: hyperscale describes size, so a hyperscale campus can be owned by the company that uses it or leased from a provider.

How colocation providers make money

By leasing capacity, which the market measures in power. CBRE reports that average asking rates in primary markets rose 4.3% in the first half of 2026 for requirements of 250 to 500 kilowatts, and 6.7% for deployments of 10 megawatts or more[1]. Listed providers report the results: Equinix had second-quarter 2026 revenue of $2.625 billion, up 16%[2], and Digital Realty $1.9 billion, up 29%[4], with new leases signed that quarter expected to bring in $307 million a year in base rent[4]. How do data centers make money? compares colocation with the cloud and GPU rental.

Why colocation space is so tight

Demand has outrun supply. CBRE says vacancy in primary North American markets hit a record low of 1.4% in the first half of 2026, down from 1.6% a year earlier[1], and that commitments had been made on 80.4% of all capacity under construction, up from 74.3%[1]. Much of the space in new buildings is spoken for before they open.

Common questions

What is a colocation data center?

A data center whose owner, a third-party company, rents space, equipment or services to other organizations, usually ones that lack the space, staff or IT resources to run their own.

What is the difference between colocation and cloud?

In colocation, a tenant rents space, equipment or services in someone else’s building. In the cloud, a provider runs the hardware and lets many users reach computing resources remotely.

Is colocation the same as a hyperscale data center?

No. Colocation describes who owns the building and who uses it; hyperscale describes size: at least 5,000 servers, 10,000 square feet and a power rating above 100 megawatts, according to analysts cited by the Congressional Research Service.

How much does colocation cost?

Prices vary by market and size and are rising. CBRE says average asking rates in primary North American markets rose 4.3% in the first half of 2026 for 250-to-500-kilowatt requirements and 6.7% for deployments of 10 megawatts or more.

Sources

1. North America Data Center Trends H1 2026
   CBRE · 2026-08-27
   3 source excerpts

   “primary market vacancy fell to a record low of 1.4% in H1 from 1.6% in H1 2025”

   “Preleasing activity accelerated with commitments made on 80.4% of all under-construction capacity, compared with 74.3% a year ago”

   “Average asking rates for 250-to-500-kW requirements across primary markets rose by 4.3% in H1 … Asking rates for 10-plus-MW deployments across primary markets rose by 6.7% in H1”

2. Equinix Reports Second-Quarter Results, Raises 2026 Guidance and Long-Term Outlook
   Equinix, Inc. · 2026-07-29
   2 source excerpts

   “Revenues $2.625 billion, a 16% increase over the same quarter of the previous year on both an as-reported basis and a normalized and constant currency basis driven by strong underlying performance and one-time xScale® fees”

   “Its digital infrastructure, data center footprint and interconnected ecosystems empower innovations that enhance our work, life and planet.”

3. Data Centers and Their Energy Consumption: Frequently Asked Questions (R48646)
   Congressional Research Service (via EveryCRSReport.com) · 2026-05-12
   4 source excerpts

   “Other organizations, especially those lacking the space, staff, or IT resources, often choose to rent a space, equipment, or services within a colocation data center (also known as a "managed data center") owned and operated by a third-party company.”

   “For example, a large company may choose to build, own, and operate an on-premises data center (also known as an "enterprise data center") to house and manage its own IT infrastructure.”

   “Some online service providers operate geographically distributed and interconnected data centers and allow multiple users to remotely access computing resources such as data processing chips, software, data storage, networks, and applications hosted by these data centers, which are called "cloud data centers."”

   “To be considered a hyperscale data center, a facility should contain at least 5,000 computer servers and a large scale of network equipment and occupy at least 10,000 square feet of physical space, with an electric power rating, sometimes referred to as power draw, exceeding 100 megawatts (MW).”

4. Digital Realty Reports Second Quarter 2026 Results
   Digital Realty Trust, Inc. · 2026-07-23
   3 source excerpts

   “Digital Realty brings companies and data together by delivering the full spectrum of data center, colocation and interconnection solutions.”

   “Digital Realty reported total revenues of $1.9 billion in the second quarter of 2026, an 18% increase from the previous quarter and a 29% increase from the same quarter last year.”

   “Signed total bookings during 2Q26 that are expected to generate $307 million of annualized GAAP base rent at 100% share”

Each source was opened and checked against the excerpt shown. Company statements are identified as such. Figures are as published; where sources differ, each is shown.