The colocation market continues to expand rapidly, driven by a wide range of customers, including hyperscalers, enterprises, telco service providers, cable MSOs, and the Tier 2/3 cloud. In 2017, enterprises moved in significant quantities over to colocation providers in order to have better access to their peers, direct connect to the cloud, flexibility, and to move the non-core expertise of designing and building data centers to someone else.

Colocation boom

Multinational enterprises are building most of their additional capacity in colocation providers, leveraging colocation to manage geographical diversity as well as proximity to customers/cloud providers. These type of enterprises still want to own their own equipment, but don’t want the burden of owning their own data centers around the world.

Smaller enterprises and most startups are also putting their equipment in colocation providers. Both of these get leverage and future scale that they could not achieve by building their own data centers. Newer companies like Uber also have a significant amount of their own compute sitting in colocation.

With widespread demand, 2017 saw an increase in capital investment and acquisitions in the colocation space. Rightfully so, with every major data center vertical increasing the use of colocation providers and most cloud metrics in the early stage in cloud buildouts, we will need a significant amount of additional square footage to meet demand. Especially with newer low-latency use cases emerging.

Future constraints

Most colocation companies are real estate investment trusts (REITs) and their ability to expand is highly leveraged towards abundant capital at low rates. They are also limited in the amount of revenue that can be generated from non-real estate offerings such as selling products or services.

Looking forward, it’s also likely that interest rates will continue to rise and there is a potential for easy capital to dry up a little. It is therefore likely that the pace of growth at colocation providers could moderate or, more importantly, the cost of new buildouts could increase – something that would be passed onto the consumer. This is especially true as some newer buildouts are within metro areas where real estate costs are higher and building square footage is lower.

In general, the cloud expansion that has been booming for the past decade and the recent boom in colocation building has never experienced high interest rates or trouble obtaining capital. So, while rate fluctuations are part of a normal economic cycle, how the cloud and colocation companies handle them in regards to expansion remains to be seen.

New services

Moving to technology, colocation providers are becoming more active in the direct-connect market, allowing their tenants to connect directly to cloud customers. They are beginning to look at enterprise-to-enterprise connectivity, AI and machine learnings workloads, and low latency applications. Also, as more enterprises join the ecosystem, they are having to offer more services to help this less tech savvy vertical. All of these advancements are good for the networking companies as they create new and adjacent markets. For example, new networking gear is needed to enable enterprise-to-enterprise connectivity, almost like an additional core layer of the network. Direct connect to the cloud is a type of DCI use case and it is likely that more fiber will be put in the ground in order to connect all these new buildings, which will help drive expansion.

All these new connections in the colocation space will drive additional 100Gbit/s and 400Gbit/s demand over the next 18 months and will help data center networking maintain robust market growth.