1. Research
Publication Date: 19 October 2007 ID Number: G00151222
Colocation Prices in U.S. Internet Data Centers Continue
to Increase Rapidly
Lydia Leong
IT managers seeking to obtain or renew contracts for data center colocation will find that
prices are escalating quickly. We provide some guidance on the market and how to find
an appropriate solution.
Key Findings
• Customers renewing colocation contracts should expect to see at least a 20% price
increase, and pricing may be as much as triple that of three years ago.
• Chicago, Atlanta, New York City, the San Francisco Bay Area, Washington DC and Los
Angeles are the tightest markets, but data center space in secondary cities is also filling
rapidly.
• We expect that prices in the most congested markets will reach as much as $120 per
square foot by the end of 2008.
Recommendations
• Consider alternative locations for your data center needs.
• Sign a contract of at least two years in length.
• Do not compromise quality to obtain space.
© 2007 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form
without prior written permission is forbidden. The information contained herein has been obtained from sources believed to
be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although
Gartner's research may discuss legal issues related to the information technology business, Gartner does not provide legal
advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors,
omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein
are subject to change without notice.

2. WHAT YOU NEED TO KNOW
Businesses that utilize colocation should expect to pay higher prices and may not be able to
obtain sufficient space. If possible, seek alternative service providers and facilities.
ANALYSIS
The price of Internet data center colocation space in the United States began to escalate rapidly
in 2005 due to a combination of increased demand and inadequate supply. Although a significant
amount of construction has taken place in 2007, and will continue into 2008, Gartner expects that
colocation prices will continue to increase through 2008 and beyond.
The shortage of space means that some businesses, particularly those using high-density
equipment such as blade servers, are having difficulty finding sufficient space to meet their
needs. In premium data centers located in major metropolitan markets, prices have increased
dramatically, from a low of around $25 per square foot in 2005, to a high of more than $100 per
square foot in the second quarter of 2007. We expect that prices could reach as much as $120
per square foot by the end of 2008, but we expect that prices will likely stabilize at around that
price point; escalation beyond that point would mean that construction or leasing will become
more cost-effective for many enterprises, thus reducing demand and creating an equilibrium
point.
Space is currently particularly constrained in the following metropolitan areas:
• Chicago
• Atlanta
• New York City (including surrounding areas in New Jersey)
• San Francisco and San Jose
• Washington DC
• Los Angeles
In those areas, the shortage of space has had the following consequences:
• Prices are going up. Customers renewing their contracts can typically expect to see a
minimum 20% price increase, and may see as much as a 300% price increase. The
typical selling price, after contract negotiation, in mid-2007, is in the range of $50 to $75
per square foot, not including the cost of power.
• Some businesses seeking new contracts for colocation have found their service provider
of choice unwilling to take a pure colocation contract, or were not able to obtain
sufficient available space in their preferred facility.
• Some businesses seeking to renew existing colocation contracts have been denied the
opportunity to renew, forcing unexpected emergency migrations of equipment to other
facilities.
• Some businesses seeking to expand their footprint within their current colocation facility
have not been able to obtain additional space.
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© 2007 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

3. • Some businesses seeking to replace equipment in their colocation space with higher-
density equipment have been told that they cannot do so, as the facility does not have
adequate power or cooling to permit this.
• Some businesses that previously obtained highly discounted pricing are finding that their
colocation vendor seems to be deliberately giving them indifferent customer service,
apparently in the hope that they will not expand their footprint and move to another
provider when their contract term is up.
Even outside of those areas, increasing demand for space has had the following effects:
• Prices are going up. Customers renewing their contracts can expect to see price
increases of between 10% and 100%, depending on the city. The typical selling price
has increased to between $40 and $65 per square foot, without power.
• Colocation companies are increasingly reluctant to offer more than 10,000 square feet of
space to a single customer. They can command higher prices and have greater flexibility
if they sell that space to multiple smaller customers. Large blocks of this sort are likely to
be available only to initial "anchor tenants" taking significant space in a newly-opened
facility.
• Power, not square footage, is the limiting factor, and contracts are priced accordingly.
Many small data centers simply cannot readily support highly-dense equipment.
Space Will Continue to be Limited
During the "dot-com boom," an excess of Internet data center capacity was built in the United
States. In the wake of the crash that followed and the economic downturn, many of these data
centers were sold to enterprises, and construction on new data centers as well as build-outs of
usable space within existing facilities was halted.
The data centers that remained have enjoyed a steady growth in business over the past four
years. In many of these facilities, managed Web hosting, rather than unmanaged colocation
services, became the primary driver for growth in space consumption. However, three key trends
have driven resurgence in demand for colocation.
• Businesses are seeking unmanaged colocation as a inexpensive alternative to
traditional disaster recovery services.
• Equipment, particularly servers, is increasingly dense, demanding more power and
cooling per square foot.
• There has been rapid growth in the demand for Internet content, as well as resurgence
in venture capital investment in Internet-centric companies.
Demand for space in the six currently over-crowded markets will remain high for the following
reasons:
• Internet-centric businesses place their servers in key network hubs such as San
Jose/San Francisco and Washington DC to maximize the performance and minimize the
price of their Internet connectivity. Even those businesses that have moved their data
centers to places where there is inexpensive power continue to colocate their network
equipment in Internet data centers, and few such dot-coms have the necessary scale to
cost-effectively build and run their own data centers.
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© 2007 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

4. • Businesses typically prefer their colocation space to be within 50 miles of their offices, or
within 100 miles at most, and readily reachable both by car and via a major airport.
Consequently, demand for space is highest where the density of businesses requiring
data centers is highest. Moreover, certain cities, such as Chicago and Atlanta,
essentially serve as the data center hub for less densely-populated regions.
Colocation providers are being very cautious in their space build-outs. They do not want to be
caught in another situation of over-capacity — they learned their lesson from the previous crash.
Moreover, prices are not likely to decline, as providers will have to acquire new space at normal
costs, rather than the pennies-on-the-dollar distressed assets available during the bankruptcy
sell-offs several years ago. Furthermore, the cost of building a data center has increased
dramatically, due to increasingly dense power requirements; 125 watts per square foot was
considered adequate in 2004, but providers are now building to densities as high as 450 watts
per square foot.
Some colocation providers — both national and regional — are, despite having adequate
amounts of space at the moment, significantly raising their colocation prices, due to growth in
their managed hosting business. Managed hosting generates far greater revenue per square foot
than colocation does and, given that further data center build-outs will be at normal costs, such
providers are trying to delay the need for additional build-outs for as long as possible and to
ensure that colocation deals are profitable. Moreover, these providers are specifically interested
in customers that they believe will take managed services over time, rather than those who will
remain purely colocation customers.
Don't Compromise Quality to Obtain Space
Despite the space constraints in key markets, businesses should not compromise quality to
obtain colocation space. In particular, businesses should ensure that they select:
• A service provider with a reputation for reliability.
• A data center that is high-quality and secure, designed to serve as a home for servers,
not telecommunications equipment.
• A data center that is carrier-neutral or, at minimum, offers the ability to select two
different Internet service providers (ISPs). These ISPs should not rely on each other for
transit.
• A data center (or multiple data centers in a fiber-connected campus) that has enough
space to meet anticipated growth needs for five years.
• A data center able to support equipment of the density that the business projects that it
will need during the next three years.
Businesses should consider alternatives to trying to grow within a market where prices are
escalating and are likely to stay at higher levels, and where competition for space will be tight in
the next twelve months.
If your location requirements are flexible, and you have not selected a colocation provider, look
for space in other major cities that have significant telecommunications capacity, but are not as
space-constrained — for example, Dallas, Houston, Denver, Boston and Miami.
If you want to use a particular colocation provider, but your location requirements are flexible, ask
what market they would recommend for you; this may require you to put some pressure on your
sales contact, as many providers organize their sales staff by region, and your salesperson may
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© 2007 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

5. be reluctant to sell you space outside his region. However, service providers often have many
data centers around the country, and not all of them will be utilized to the same extent. This is
likely to be the most cost-efficient way to obtain space for disaster recovery purposes.
If you need to stay within a particular metropolitan area, look at the local data center providers.
While the quality of these facilities, their reliability and their customer service varies considerably,
one of them may meet your needs. Also, consider some lesser-known national or regional
providers, such as Peak 10, Peer 1 Networks, Terremark or ViaWest. These providers often have
very high-quality facilities and a greater amount of available space.
Tactical Guidelines
If you are currently seeking colocation services in a space-constrained market:
• Consider alternative providers and locations if you can, but do not compromise quality to
obtain space.
• Ensure that the data center you choose has enough space and power to accommodate
your growth. Guarantee this contractually, if possible.
• Keep your power density requirements in mind. If you have low-density equipment, you
are likely to be a much more attractive customer and you can negotiate accordingly. If
you have very high densities, you have significantly less negotiating leverage, and will
also have a much more limited number of facilities that can potentially serve you.
• Sign a two-year contract. Service providers may encourage you to sign a one-year
contract or limit you to no more than two years. In the past, when colocation pricing was
declining, shorter contracts favored the customer; now, they favor the service provider.
If you have an existing contract for colocation that will be expiring within the next six months:
• Find out what the situation in your current data center is. Does your service provider
expect to have space available for you and, if so, will it be enough to accommodate
future growth as well as current needs? What is the provider currently charging?
• Create a contingency plan, both for moving existing equipment and for how to
accommodate future growth needs if your current service provider does not have the
space.
• Ensure that you budget for higher prices, and that you can absorb a sudden increase.
Some colocation companies will allow you to phase in higher prices over the course of a
contract, but in many cases, the new prices start at the commencement of your new
contract.
• Expect to pay for the power that you use, on a per-circuit basis. Also, colocation
contracts now frequently have power pricing escalators built in, allowing the colocation
company to re-price power each year, based on the price of utility power. Typically,
these clauses cannot be negotiated; we believe that they are fair, since they protect
colocation companies against sudden jumps in energy prices.
• If you're happy with your current provider, try to sign a three-year contract. It will result in
a better discount and protect you from the continued escalation of prices.
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