Colocation hosting is a step ahead of dedicated hosting. It is similar to dedicated server hosting where the complete resources are allocated to your website but in this case you are owner of the server. In simple words, you purchase the hardware of your choice and place it with the hosting company, and you just rent the physical space in their data center and high-speed internet connectivity.
With colocation facility you have the flexibility to choose the hardware configuration of the server you deem necessary and the software needed with it. The other requisites such as uninterrupted power supply and high-speed internet connection, cooling system, fire control systems are all taken care of by the hosting company.
Colocating the server requires you to rent a physical space with the hosting company, so you pay for the server and later for the colocating charges. Thus colocation hosting is comparatively costlier than renting a server (dedicated hosting) from the hosting company.
There are two types of Colocation services viz., i) Managed and ii) Unmanaged.
i)    Managed Colocation Services: When you rent a physical space with the hosting company and also technical support to manage your server it is known as Managed hosting. Companies that are in need of complete authority over their hardware but do no posses the required people to manage it for them can very well go for managed hosting service.
ii)    Unmanaged colocation Services: When you only want to rent the space for the server and take care of the management as well as administration of the server yourself then you can opt for unmanaged colocation. You also need to manage the web server, software upgrades and the website as well.