It's the most confusing aspect of the game, and it doesn't help that Tidus is misled into believing that he travelled through time for 90% of the game. He (reasonably) assumes that DZ and Zanarkand exist in the same location. Since they don't they can exist at the same time.

'Dream' is also a misleading because we think of dreams as insubstantial, but in FFX the dreams of the Fayth can have a physical coporeal existence, as long as they dream continuously.