Expanding Horizons: The Evolution of Interconnection and Carrier Hotel Infrastructure in Tier 2 and 3 Markets
The rapid evolution of digital technologies, from artificial intelligence (AI) to hyperscale computing, is driving fundamental shifts in data infrastructure. Traditionally, Tier 1 cities have been the epicenter of interconnection and carrier hotel activity. However, the limitations of power availability, real estate constraints, and increasing latency sensitivity are pushing the industry to explore alternatives. Today, the rise of strategically developed campuses and the need to efficiently move massive amounts of content are reshaping the role of Tier 2 and 3 markets. These regions are emerging as critical hubs, driven not by overflow but by intentional efforts to meet the demands of localized connectivity and the increasing complexity of data flow required by hyperscalers and AI-driven applications.
The Rise of Tier 2 and 3 Markets in the Digital Ecosystem
The growth of “massive islands of data” created by hyperscalers and AI companies highlights the necessity for effective interconnection points. These islands, housing petabytes of information, require efficient transit routes to move data quickly to end-users. That need is amplified by the shift toward AI inference workloads, which require lower latency and more distributed compute environments closer to population centers.
To address these needs, Tier 2 and 3 markets are seeing significant investments in advanced facilities that enable faster and more direct connectivity. The demand for proximity to users and localized processing is transforming these regions into interconnection hubs. Edge data centers and carrier hotels in Tier 2 and 3 cities minimize latency—a critical factor for AI inference and IoT devices—and enable businesses to unlock new economic opportunities.
To meet these needs, companies are actively enhancing their carrier hotel inventory. Rather than focusing solely on greenfield developments, many are repurposing legacy telecom and enterprise facilities—leveraging embedded network density and real estate advantages. By strategically expanding into these markets, they are creating facilities capable of handling higher-density operations, with advanced cooling and power solutions tailored to AI and hyperscale requirements.
Examples of this shift are visible in markets like South Bend, Indiana, and Milwaukee, Wisconsin—two cities where historic telecom infrastructure is being upgraded to meet modern interconnection needs. In Indiana, Amazon Web Services (AWS) has committed to a historic $11 billion investment to build a data center campus near New Carlisle, marking the largest capital investment in Indiana’s history and expected to create over 1,000 new jobs over the next decade. Simultaneously, Microsoft is advancing plans for two significant data center projects in the region: a $1 billion facility in LaPorte and a 900-acre development in Mishawaka, both aimed at bolstering cloud computing and AI infrastructure.
In Wisconsin, Microsoft has announced a $3.3 billion investment to establish a state-of-the-art data center campus in Mount Pleasant, part of a broader initiative to transform Southeast Wisconsin into a hub for AI-powered economic activity. Additionally, Avant Technologies plans to build its first AI-focused data center in Milwaukee, further signaling the city’s emergence as a critical node in the nation’s digital infrastructure network.
These substantial investments by tech giants like Amazon and Microsoft illustrate how Tier 2 and 3 cities are not only keeping pace with digital infrastructure trends but are becoming catalysts for the next phase of technological advancement. By selecting these regions for their significant projects, these companies are acknowledging the strategic advantages offered by secondary markets, including available land, existing infrastructure, and a growing talent pool.
Industry Impacts: Challenges and Opportunities
The decentralization of interconnection brings both opportunities and challenges. On the positive side, this trend is reshaping the industry in several ways:
- Balanced Data Traffic: New facilities in Tier 2 and 3 markets are improving the flow of data across regions, reducing dependency on Tier 1 hubs.
- Enhanced User Experience: Proximity to users improves latency, supporting real-time applications and services.
- Economic Growth: Secondary markets benefit from increased investment, job creation, and technological advancement. This includes indirect benefits such as fiber network expansion, utility upgrades, and workforce development.
However, implementing such changes comes with hurdles. Many existing buildings in Tier 2 and 3 cities were not designed for today’s high-density power and cooling requirements. Retrofitting these facilities requires specialized expertise and significant financial investment. Moreover, educating local stakeholders about the value of interconnection and gaining community support can be time-consuming but remains critical to achieving success.
Preparing for the Next Phase
To remain competitive in this shifting landscape, businesses must prioritize flexibility and innovation. Facilities need to accommodate high-density operations while offering scalability to meet evolving demands. Adaptive infrastructure designs, which incorporate modular and scalable solutions, can help operators stay ahead of market needs.
Strategic location selection is also essential. Identifying interconnection points in Tier 2 and 3 markets ensures low-latency access for critical workloads, helping businesses deliver on user expectations for real-time services. By designing campuses with advanced features, such as liquid cooling and energy-efficient systems, companies can support the power and processing needs of AI and hyperscale environments.
As environmental concerns rise, companies must adopt sustainable practices to comply with tightening environmental regulations. Facilities in secondary markets should integrate renewable energy sources and energy-efficient designs into their operations. Doing so also helps overcome infrastructure limitations by reducing strain on the local grid. By incorporating sustainability into their business models, operators can attract environmentally conscious clients and remain aligned with global carbon-neutral goals.
Looking Ahead to a Decentralized Future
The rise of Tier 2 and 3 markets marks a significant shift in the interconnection landscape. These markets, driven by strategic investments in new campuses and connectivity solutions, are redefining the data center industry. Over the next decade, edge nodes and compact, high-capacity facilities near end-users will become standard. These hubs will not only support AI and IoT applications but also revolutionize the way businesses and consumers interact with technology.
As the industry continues to evolve, businesses that embrace these changes will seize new opportunities while addressing the challenges of a decentralized digital economy. Tier 2 and 3 markets are poised to become the backbone of tomorrow’s interconnected world, bridging the gap between hyperscale capabilities and local accessibility.