As the digital economy expands exponentially, the global demand for data centers continues to rise. Traditionally, hyperscalers—large cloud service providers like AWS, Microsoft Azure, Google Cloud, and Oracle Cloud Infrastructure—have established their data centers in Tier-1 cities like Tokyo, Singapore, Mumbai, Frankfurt, and Silicon Valley. However, a paradigm shift is underway: Tier-2 cities are fast emerging as the new epicenters of data center growth, thanks to improved infrastructure, growing digital demand, and cost advantages.
Among the strategies being adopted to navigate this transformation is data center co-location—a model where companies rent physical space, power, and cooling from third-party data center providers. This approach, long favored for its flexibility and scalability, is now being rapidly embraced by hyperscalers looking to expand beyond congested and expensive Tier-1 locations.
This article delves deep into the catalysts driving this shift, the strategic benefits of co-location in Tier-2 cities, challenges to consider, and why this trend represents the next frontier for hyperscalers.
1. Understanding the Data Center Evolution
The traditional model of data centers being located in Tier-1 cities made perfect sense two decades ago. These cities offered superior connectivity, proximity to financial hubs, and an established enterprise ecosystem. But this advantage has come at a cost—soaring real estate prices, escalating power costs, space constraints, and regulatory bottlenecks.
Moreover, user behavior is shifting. With the widespread adoption of streaming platforms, social media, online education, IoT, and AI-driven applications, data generation has become highly decentralized. This geographical diversification of data needs is prompting hyperscalers to explore infrastructure in less saturated markets.
2. Why Tier-2 Cities?
a) Cost Optimization
Real estate and operational costs in Tier-2 cities are typically 30–50% lower than in their Tier-1 counterparts. This makes them attractive for establishing or leasing high-capacity data centers. Furthermore, government incentives, reduced taxation, and relaxed zoning laws in Tier-2 cities often sweeten the deal.
b) Proximity to Emerging Demand Clusters
Cities like Nagpur, Jaipur, Coimbatore, Osaka, Davao, and Busan are becoming tech hubs in their own right. Startups, SMBs, and even large corporations are setting up base in these cities to tap into local talent and reduce overheads. This, in turn, creates localized demand for cloud and digital services, making them ideal zones for edge computing and co-location facilities.
c) Infrastructure Maturity
The once-valid argument that Tier-2 cities lacked fiber connectivity or reliable power no longer holds water. Governments and telecom operators have heavily invested in upgrading digital infrastructure in these regions. Submarine cable landing points are being diversified, and Tier-2 cities are now part of the national smart grid, with redundancy and uptime guarantees approaching Tier-1 standards.
d) Sustainability Goals
Many Tier-2 cities offer access to renewable energy sources—hydropower in certain regions, wind in coastal towns, and solar in high-insolation areas. As hyperscalers commit to net-zero and carbon-neutral goals, these cities present an opportunity to reduce Scope 2 emissions.
3. Co-Location: The Ideal Bridge for Hyperscaler Expansion
Building hyperscale data centers from the ground up can take 18 to 36 months and require capital expenditures running into hundreds of millions of dollars. Co-location serves as a middle ground, allowing hyperscalers to quickly enter new markets while maintaining operational control over hardware, network, and security protocols.
Benefits of Co-location for Hyperscalers:
Speed to Market: Hyperscalers can lease space and deploy compute/storage nodes in a matter of weeks rather than waiting for full builds.
CapEx to OpEx Shift: Instead of committing upfront capital, cloud providers can pay-as-they-grow, preserving liquidity.
Risk Diversification: New and emerging markets carry a level of risk. Co-location enables testing the waters before full-fledged investment.
Edge Enablement: Co-location facilities can be strategically positioned near users, reducing latency and enhancing customer experience.
4. Global Examples of Tier-2 Data Center Momentum
India: Pune, Jaipur, and Coimbatore
India’s data localization push and digital boom have accelerated demand beyond Mumbai, Delhi, and Bangalore. Tier-2 cities like Pune and Coimbatore are witnessing heavy investments from players like CtrlS, Yotta Infrastructure, and STT GDC.
Japan: Osaka and Fukuoka
While Tokyo remains a dominant hyperscale hub, Osaka has emerged as a disaster recovery and edge location, attracting hyperscalers due to its earthquake-resistant data centers and robust power infrastructure. Fukuoka is next in line, with several modular data centers already in planning.
Southeast Asia: Davao (Philippines) and Johor (Malaysia)
Johor is becoming a spillover location for Singapore-based hyperscalers constrained by land and power availability. Davao offers attractive government incentives and low power tariffs, making it an appealing secondary site in the Philippines.
U.S.: Columbus (Ohio) and Reno (Nevada)
Hyperscalers such as Amazon and Google have invested heavily in data centers in Reno and Columbus, which offer strong fiber connectivity, favorable tax environments, and affordable renewable energy.
5. Strategic Considerations for Hyperscalers Moving into Tier-2
While the opportunities are compelling, hyperscalers must account for several strategic and operational factors before scaling in Tier-2 cities:
a) Regulatory Landscape
Not all Tier-2 cities have mature regulatory frameworks for large-scale data center operations. It’s crucial to ensure land-use clarity, energy licensing, environmental compliance, and data sovereignty laws.
b) Workforce Availability
Though costs are lower, the availability of skilled workforce for running advanced cloud infrastructure, network ops, and facility management may be limited. Training programs and partnerships with local universities can help bridge the gap.
c) Infrastructure Redundancy
Power outages, limited connectivity providers, and underdeveloped last-mile infrastructure are real concerns in some Tier-2 cities. Hyperscalers must ensure multi-path redundancy, backup power systems, and vendor SLAs to match Tier-1 uptime standards.
d) Security and Risk Management
Physical security, disaster preparedness, and cybersecurity resilience should be non-negotiables. Co-location partners must offer comprehensive risk mitigation plans to match hyperscaler standards.
6. Hyperscaler-CoLo Partnerships: A Growing Trend
Several hyperscalers have already moved aggressively in this space by forging partnerships with co-location providers:
Google Cloud & Equinix: Joint ventures to bring GCP’s edge services to co-lo facilities in secondary markets.
Microsoft Azure & Digital Realty: Azure ExpressRoute connectivity now available in multiple Tier-2 co-los.
AWS & Iron Mountain: AWS Outposts are being hosted in Iron Mountain’s regional data centers.
Oracle Cloud Infrastructure & STT GDC/NTT: OCI has partnered to host infrastructure in Tier-2 cities across India and Japan.
These partnerships show how co-location is not merely a stopgap but a strategic element of hyperscaler go-to-market planning.
7. ESG and Sustainability: Co-location as a Green Strategy
Hyperscalers are under immense pressure to meet sustainability targets. Co-location providers in Tier-2 cities are increasingly offering green-certified facilities, including:
LEED and BREEAM certifications
Renewable energy Power Purchase Agreements (PPAs)
Rainwater harvesting and greywater recycling
Advanced heat management systems
This enables hyperscalers to meet ESG mandates while also promoting local green development.
8. Future Outlook: Are Tier-2 Cities the New Hyperscale Heartlands?
The writing is on the wall: the next wave of data center expansion will come from edge-aware, scalable, and sustainable deployments in Tier-2 geographies.
What began as tactical capacity overflow strategies are evolving into core infrastructure investments. As co-location providers scale up offerings in power capacity, physical security, cooling efficiency, and connectivity, hyperscalers will have more reason to shift critical infrastructure outside conventional metros.
The future belongs to a hybrid strategy—a blend of owned hyperscale campuses in Tier-1 cities and flexible, modular, and distributed co-location nodes in Tier-2 cities.
9. Final Thoughts
The data gravity is changing. As digital infrastructure pushes further into the interiors of countries, and as users demand faster, more reliable services from their cloud providers, Tier-2 cities present a viable, cost-effective, and strategic opportunity. Co-location isn’t just about renting space—it’s about being closer to users, reducing latency, optimizing operational spend, and driving sustainability.
Hyperscalers that embrace this shift now will not only de-risk their infrastructure strategy but also future-proof their market positioning in an increasingly edge-first world.
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