The massive boom in AI spending has fueled record demand for data center space. Companies are investing billions of dollars in data center infrastructure in an effort to keep up with AI processing loads. Many companies depend on external data centers to house their equipment and provide electricity and related services.

Data center tenants are typically cloud services providers, hyperscalers, or other business enterprises. Hyperscalers, which include large technology companies such as Amazon and Google, are the fastest growing category of tenants. The data center landlord owns and leases out the data center space and agrees to provide the tenants with infrastructure and power supply.

A data center lease agreement outlines the rights of the landlord and tenant to the data center premises. Much like a traditional lease agreement, a data center lease agreement sets forth the lease terms, rent payment obligations, and a description of what constitutes the premises.

The specific terms of the data center space leasing contract will depend on whether the contractual arrangement is for shared colocation (commonly referred to as “colo”) data center space or dedicated data center hosting. A colocation data center refers to a data center that rents out space to multiple tenants. Colocation costs are typically cheaper for tenants since each tenant is responsible for managing their own server hardware. The data center lease provides each tenant with power supply, advanced cooling infrastructure, and network connectivity, but does not provide server hardware. In contrast, in a dedicated hosting arrangement, the data center also provides server infrastructure for the tenant to lease. As a result, dedicated hosting involves higher long-term costs.

As a tenant, it is important to scrutinize the quality of the infrastructure at the data center space. Specifically, you should understand whether the data center uses reliable and sustainable sources of power, whether the data center uses technologically advanced cooling systems, and whether the data center has strong network connectivity. The tenant should make sure the language in the data center lease agreement adequately protects the tenant in the event of infrastructure quality issues.

The companies that build data centers must coordinate with local power utilities. Powering data centers requires significant amounts of energy, which can strain the grid. In addition, local political and community opposition could hinder a data center provider’s ability to provide a reliable power supply.

Other key issues to be considered in negotiating a data center lease agreement include the tenant’s ability to expand power usage at a pre-negotiated rate, the triggering events for terminating the lease agreement, and liability obligations if equipment is damaged. The terms will also vary if a contract is being entered into with a data center managed services provider (MSP), which is a third party that helps manage the tenant’s equipment and provides maintenance support as needed.

Companies that provide data center infrastructure and colocation have been in high demand. Such companies include Equinix and Digital Realty. Blackstone has invested billions of dollars into owning, building, and operating data centers as it aspires to be the largest owner of data centers in the world. In 2021, Blackstone acquired the data center provider QTS Realty Trust for $10 billion.