I believe they used Wifi BSSID tracking for that, GPS would be too battery heavy. If you're connected to the same Wifi networks it can reasonably assume you're in the same vicinity.

It's possible Facebook uses location data for this, but I've got an alternate theories.

This happens to me often too, with much briefer encounters: mainly dates and meetups. Since I've shared similar amounts of time at the same restaurant with hundreds or thousands people with whom I had no interaction, many of who's arrival and departure times would happen by chance to line up with mine, they must be using something else. I also share a duplex-house and an office building with people who've never been inexplicably recommended on Facebook.

From these observations, I've come to think that location data has to play a very small role in Facebook's recommendation system.

Here's my best (but untested) theory to explain this: Your house-mate searched for you on Facebook, which triggered Facebook to think you might be friends.