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The colocation data center market demand is strong for the foreseeable future, but providers face resource and capacity challenges in regards to trends like artificial intelligence, the Internet of Things and climate change.

That was the prominent takeaway from analyst speaking session – at this year’s International Colocation Club – presented by Kelly Morgan, Vice President for Data Center Services at 451 Research. I always enjoy hearing from industry experts at these events – Morgan communicated a promising market outlook overall, but made clear colocation providers will have to deal with significant change with respect to both technology and customer expectations.

Rosy Colocation Market Outlook

First, the good news. 451 Research is predicting steady growth in the global colocation market through 2029, averaging in the high single digits. Some regions will grow by larger percentages, including Asia Pacific and Latin America, which will be closer to 10%. The U.S. and Europe will grow by around 3% to 4% – in part because they’re huge markets already.

In large markets like Northern Virginia and Dallas, even low single-digit growth equates to a lot of data center space. The amount of space Northern Virginia adds in a single year is larger than the entire market for Portland, Ore. and other smaller cities, Morgan said.

Another encouraging sign has to do with cloud, which Morgan says is still in early days. A lot of enterprises aren’t yet using cloud at all. In fact, in Europe only about 20% of enterprises use cloud services. “So, there’s still a huge amount of potential growth out there for cloud providers,” she said.

Four Key Influences to the Data Center Market

Most of Morgan’s presentation focused on the four key influences she says colocation providers will have to deal with in coming years.

First is hybrid cloud, which she says enterprises have decided “is the way it’s going to be.” Companies are using multiple cloud providers, mixing and matching on-premises and off, along with private cloud and hosted infrastructure. All of that will be a big driver for providers.

“It’s helpful for enterprises – although they don’t realize this yet – to be in a colocation location where they can connect to multiple cloud providers and to hosted private cloud options,” Morgan said. “That’s going to be the way forward.”

Secondly, Artificial intelligence (AI) and machine learning (ML) are drivers for colocation services. 451 Research surveys show nearly 50% of companies are either already deploying AI/ML applications or plan to in the coming year. “This is here,” she says.

The challenge is AI/ML applications drive up rack density, which overall hasn’t changed much in 10 years. Now, however, she says many companies have some racks of 30kW or more. “That is dramatic. We didn’t see any of those 5 years ago.” The challenge for colocation providers is that most racks will be in the 5kW to 10kW range, but they still have to deal with a room with 40kW racks. It’s a phenomenon that will change the economics and incentives to invest in liquid cooling, which she says is becoming easier to work with. (That’s not the only reason to consider liquid cooling).

Thirdly, Internet of Things (IoT) applications are also driving demand for colo facilities. Morgan’s research indicates 70% to 75% of companies either already have or plan to implement IoT applications and around one-third said they will have to add storage capacity in the coming year to deal with it.

Currently, around 80% of IoT data is on-premises, but customers expect that to flip within about 2 years, with 80% of IoT data moving to the cloud. That will have implications for where data center space is needed, driving demand for capacity in large cities and at the edge – both prime opportunities for colocation providers.

The final influencer is environmental changes. Some areas are getting hotter and others cooler, flood zones are being redefined and the risk of fire is all too real in some areas, notably in California.

“As you get more unpredictability, enterprise interest in outsourcing this risk goes up,” Morgan said. After Hurricane Sandy hit New York a few years ago, there was a rush among companies there to outsource data centers to colocation providers both outside and within the region. It’s a situation that presents a lot of potential for colocation providers to explain their value proposition to potential customers.

Final Takeaway – Level-up on Solutions and Innovation

In her parting thoughts, Morgan summed up the opportunity and challenges facing the colocation industry. While demand is expected to stay strong, those that fare best will be the companies that deliver solutions to customers, not just products.

Some, she said, are starting to call data centers “invisible infrastructure.” Like electricity, she said, “people want it to just work… If you can make sure firms don’t have to think about you, that’s a big advantage” and a differentiator, she said.

At the same time, it’s important to be innovative in areas like renewable energy and with edge deployments, such as with modular micro data centers. Innovative cooling strategies will also be important as AI and ML continue to take hold, increasing data center density.

What’s Next for the Colocation Data Center Market?

For me, Morgan’s overview was like a vote of confidence in the work Schneider Electric has been doing to address all of these challenges, from our modular data centers to innovative new cooling solutions, including water-based systems. Watch her presentation, What’s Next for the Colocation and Wholesale Data Center Business?, for yourself to hear more about the challenges that lay ahead, but also the opportunities to grow your colocation business.

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