Hyperscale vs. Colocation: What Data Center Developers Need to Know
The data center market is projected to exceed $340 billion globally by 2030, according to Synergy Research Group. But treating it as a single market obscures a critical distinction that determines everything from capital structure to site selection: hyperscale versus colocation.
These two models serve different tenants, require different capital structures, demand different site characteristics, and produce fundamentally different risk-return profiles. Developers and investors who conflate them make expensive mistakes.
What Defines Each Model?
Hyperscale data centers are purpose-built facilities for a single tenant — typically one of the major cloud providers (Amazon Web Services, Microsoft Azure, Google Cloud) or large technology companies (Meta, Apple, Oracle). A single hyperscale campus may span 50-200+ MW of IT load, require 50-200 acres of land, and cost $500 million to $2 billion+ to construct.
The tenant relationship is defined by long-term leases (10-20 years), with the hyperscaler specifying detailed design requirements. The developer builds to the tenant's specifications and delivers a powered shell or fully fitted facility.
Colocation data centers serve multiple tenants within a shared facility. A typical colocation facility ranges from 5-50 MW and houses dozens to hundreds of enterprise customers. Tenants lease individual cabinets, cages, or suites within the building, sharing common infrastructure (power, cooling, connectivity, security).
The developer builds to market specifications and leases space to a diversified tenant base on shorter terms (3-5 year initial terms with renewals).
Capital Requirements and Returns
The financial profiles diverge sharply.
Hyperscale development requires massive upfront capital — $8-12 million per MW for a powered shell, $15-20+ million per MW for a fully fitted facility. A 100 MW campus represents a $1-2 billion commitment. However, the single-tenant lease structure (often investment-grade credit) enables favorable debt financing. JLL reports that stabilized hyperscale yields have compressed to 5.5-7.0% cap rates in primary markets.
Colocation development requires lower absolute capital ($10-15 million per MW on average due to higher density and shared infrastructure) but produces more complex cash flows. Revenue builds gradually as the facility leases up, creating a J-curve in returns. Stabilized colocation facilities in strong markets achieve 7.0-9.0% cap rates according to CBRE, reflecting the higher management intensity and lease rollover risk.
Digital Realty, Equinix, and CyrusOne illustrate the spectrum. Digital Realty operates both hyperscale and colocation. Equinix focuses primarily on colocation with a network-dense interconnection model. Each company's site selection criteria differ accordingly.
How Site Selection Differs
The site selection criteria diverge in critical ways that developers must understand.
Power requirements. Hyperscale campuses require 50-200+ MW of dedicated power — often necessitating a dedicated substation and direct transmission connection. Colocation facilities typically require 5-50 MW, which can often be served from existing utility infrastructure with moderate upgrades.
Land requirements. Hyperscale developments need 50-200+ acres to accommodate the initial build plus future phases. Colocation facilities typically occupy 5-20 acres. This difference fundamentally changes the geographic search area — hyperscale sites are increasingly found in suburban and rural locations, while colocation thrives in urban and near-urban settings where network connectivity is dense.
Network connectivity. Colocation facilities depend on network diversity — multiple fiber carriers, proximity to internet exchange points, and low-latency connections to end users. Hyperscale facilities prioritize backbone connectivity and inter-region data transfer capacity but are less dependent on local network diversity.
Permitting and community relations. Hyperscale developments face increasing community scrutiny due to their scale, water consumption (for cooling), noise, and aesthetic impact. Loudoun County, Virginia — the world's densest data center market — has implemented zoning restrictions specifically targeting hyperscale development. Colocation facilities, being smaller, generally face fewer community challenges.
The Convergence Trend
A growing number of developers are pursuing hybrid strategies. QTS Realty (acquired by Blackstone for $10 billion in 2021) operates campuses that accommodate both hyperscale and colocation tenants. Vantage Data Centers has expanded from pure hyperscale into colocation in select markets.
The logic is portfolio diversification: hyperscale provides stable, long-duration cash flows while colocation provides higher yields and pricing power. The challenge is that operating both models effectively requires different sales organizations, different engineering teams, and different operational capabilities.
What AI-Powered Analysis Reveals
The hyperscale vs. colocation decision increasingly benefits from AI-driven analysis. Machine learning models can evaluate power procurement timelines across utility territories, model tenant demand by submarket based on enterprise IT spending patterns, and score sites against the distinct criteria each model demands.
At Build, our platform helps data center developers evaluate sites against both hyperscale and colocation criteria simultaneously — identifying parcels that could support either model depending on market conditions. This flexibility is increasingly valuable as the market evolves and developers need to respond quickly to tenant demand signals.
For institutional investors allocating capital to data centers, understanding the hyperscale-colocation distinction is not optional. It determines everything from risk profile to return expectations to the geographic markets worth targeting. Getting it wrong is expensive. Getting it right, with the right analytical tools, is the foundation of successful data center investment.