Apple devices talk to each other and listen without needing the internet or a server or a network.
Look up Rendezvous and Bonjour and mDNS as they are the marketing and technical terms of the first iteration of this capability. More recent devices have enhanced capabilities including NFC and Bluetooth range estimation - look up Bluetooth Beacons for that iteration of this feature.
Lastly, the most advanced tech that Apple ships is ultra wide band radio chipsets that augment the previous technologies with time of flight measurements to answer hypothetical situations like “Is your watch closer to the HomePod than your phone?” for instance.
The hardware and software are capable of mapping out space and time to figure out where they are in the world as well as how close to other devices they may be moment to moment. Apple then synthesizes a reaction based on multiple signals to let you know a hotspot may be near. This can be as simple as hearing a WiFi beacon indicating a device provides this service or a cryptographically signed two way handshake to validate your AppleID signed in recently on two devices and they can trust the identity and validity of a handshake data exchange.