Well, this is totally cool. I don't ever remember a grandmother posting here in support of a grandchild riding a bike, especially being a non rider. Totally cool and he will hopefully come to better understand and appreciate what you are doing and how fortunate he is!!!
To answer your question is difficult. If he is happy toodling around in circles, let him keep going and having fun. More land is always better than less. My grandson is 6 and just getting interested in riding. He got a bike for Christmas a year ago, but is just now seeing the potential that is sitting there in the garage.
Regarding the size of his bike, again there is no easy answer. A PW80 is a fairly large bike, or would be for my grandson, although he is a big kid. As long as he is not wringing it out at top speed and doing other crazy stuff, it is a great bike for him to learn on.
There is a forum dedicated to the minis here on DRN. I'm sure many Moms and Dads, that hang out there, can give you more help.
Also, fill in you location in your User CP. There may well be a member just around the corner that can let your grandson try a larger bike out. They may also know where some tracks are in your area that have peewee tracks.