With dementia, memory is just one thing that is impaired with the brain, but the brain has many more functions, most of which are automatic for someone without dementia.
As far as I know, when spatial awareness is affected, it is just the brain losing the ability to interpret the sensory signals it receives - from eyes, sense of balance, hands, hearing.
So, things like receiving a mug of tea, or walking with a mug, can be a problem when spatial awareness goes. Tea is often spilt. What is up may not be able to be translated to the mug of tea in the hand, and it may tilt sideways.
A dark rug on the floor may appear to be a hole.
Their own face in a mirror may appear to be somebody else.
They may be uncertain when moving forward how far down the floor is - hence frequently they shuffle along to maintain contact with the floor.
They may grasp things for support as they cross a room - in the way someone who has had too much alcohol may do.
Sometimes they may lean heavily back, or forward, or to one side or the other.
I always imagine it as being like a person with a blindfold on, having to negotiate a series of tasks in a strange environment. Only the person has also had 5 gin and tonics in rapid succession.
Try it sometime, and you may get to see how scary it can be.