Paper review: The editor is from the same university as the first author and asking for a meeting I was asked to review a paper for a rather important Journal in my field (engineering discipline). The editor (professor) who assigned the review to me is based at the same university as the first author (PhD student). The two do not come from the same chair, but the university is quite small and it is likely they do know one another personally. 

Furthermore, the editor suggested a meeting to discuss my opinion on the manuscript in person. He is currently in my area. Since I know him from conferences it would be difficult to decline his meeting request.

So now I am not sure if this represents a conflict in interests or if I am being too paranoid here? If this is critical, how should I react?
Being from the same university may or may not be an issue (it's hard to judge without knowing more details).  Asking to discuss a manuscript in person, however, is a huge red flag.  

Communication about manuscripts should pretty much always go through official channels only, thus keeping an accessible record of the complete decision-making process.  Only in dealing with exceptional situations (e.g., plagiarism, negotiating transfer to another journal) is there likely to be any communication outside of these channels, and even then it should be written down.  This is to protect both the integrity of the process and also everybody involved---authors, reviewers, editors, publisher---since both acceptance and rejection are capable of ending up quite contentious.

The fact that this editor is asking to talk with you in person before you've even written your review sounds extremely dubious to me, and would cause me to decline to review for reasons of unprofessionalism.  There may or may not be anything incorrect going on, but it's at least evidence of a rather callous sloppiness that I would not like to be involved with in any way.