Australian firms pivot to colocation data centres as AI demand surges

The humble server room tucked behind the accounts department is quietly disappearing from Australian offices. Businesses aren’t using less computing power — they need more. AI-heavy workloads, remote-first operations and a tightening compliance environment are pushing demand for capacity faster than many IT teams can scale on site.

For a growing cohort, the answer is colocation. Colocation involves renting space in a purpose-built, enterprise-grade data centre while retaining control of your own hardware — servers, storage and networking. The provider supplies the critical infrastructure around it: redundant power and UPS, precision cooling, multi-layered physical security and high-capacity internet and private network links.

It sits between the extremes of building a facility from scratch, which requires major capital and years of engineering, and shifting entirely to public cloud, which offers speed and flexibility but can produce unpredictable costs at scale and limits direct hardware control.

Managed hosting occupies a middle ground, though the provider owns the hardware, constraining bespoke configurations for high-performance workloads. The market shift is already well under way. Australia’s colocation market was valued at USD 1.72 billion in 2024 and is projected to reach USD 4.98 billion by 2030, a compound annual growth rate of 19.34%, according to Arizton’s 2025 market analysis.

Colocation accounts for 72.62% of the country’s entire data centre market, making it the dominant model by a wide margin, per Mordor Intelligence’s 2025 industry report. Supply is racing to keep up. There are 145 operational colocation facilities nationwide, with 37 more in active development.

Sydney leads with 41 facilities and Melbourne follows with 23, with expansion also underway in Perth, Brisbane and Canberra. Arizton’s 2025 research describes the incoming 37 sites as a step-change in available capacity. Several forces are driving the move. AI is the clearest pressure point: GPU-dense compute can push rack power density past 100 kW per rack, well beyond what a typical office server room can support.

Purpose-built colocation facilities are designed for these loads; most office buildings are not. Hyperscaler investment is amplifying demand as well, with Amazon Web Services committing AUD 20 billion to infrastructure in Australia and Microsoft committing AUD 5 billion.

The network fabric is strengthening in parallel. In March 2025, Colt Technology Services expanded its Sydney network to connect more than 250 commercial buildings and 20 data centres with 400 Gbps metro connectivity, targeting AI and machine learning clients. As capacity comes online, decisions about where to colocate hinge on data footprint, compliance obligations and growth trajectories.

Smaller businesses often start with retail colocation — a single rack or half-rack — while larger enterprises opt for wholesale space such as dedicated suites or entire data hall floors. Ultimately, matching workload profiles to the right facility tier, location and connectivity options remains the critical choice.