That comes from Advaita and the idea is the illusion is seeing the temporal as having inherent existence. Advaita states the physical universe only "borrows" its existence from Brahman which has inherent existence, and in fact is Brahman appearing as name, form and function (appearing as not Brahman). The illusion is not recognizing the temporal as Brahman. Seeing it as a multiplicity instead of One.

The dream analogy is often used. The dream is the illusion and the dream body and entire contents of the dream are unreal, an illusion, and the reality is there's only the dreamer appearing as the dream.

Another analogy is that of the Sun reflected in millions, billions, trillions of drops of water or a face reflected in countless mirrors of different shapes.

So it's not saying physical reality is an illusion or unreal, just not real enough. Another way it's stated is physical reality is transactional reality and Brahman is absolute reality.