<networking> /koh'loh-kay`sh*n/ or /koh`loh-kay'sh*n/ (Or "colocation") Providing network connections such as Internet leased lines to several servers housed together in a server room. This is typically provided as a commercial service.
The hyphenated form is correct and the most common on the web, followed by "colocation". "collocation" (/ko`loh-kay'sh*n/, not /koh'-/), is an old word with a similar meaning. It is common in dictionaries and follows the pattern of other Latin-derived words like collect, college, and collate, but is least common on the web.
The verbal form is "to colocate" or "co-locate" (commonly /koh'loh`kayt/, also (US) /koh`loh'kayt/).