The term co-location represents an organizational technique in which the location of team members is determined in a strategic way to maximize productivity. The specific ways in which this is done is varied, but essentially as follows. When co-location is practiced at the start o a project (or, for that matter, it can be enacted at any time), the project team members are moved to alternate locations (either full-time or only for parts of days) to allow them to better work with one another, and on the project in general. This is because typically this newer organizational placement is done in a way which provides for improved communication among the team members, the ability to form better and closer working relationships, and in many cases can lead to improved productivity (for the reasons above as well as for other more materials ones, such as better access to sophisticated office equipment).
This term is defined in the 3rd and the 4th edition of the PMBOK.