A game only has to simulate real world physics, meaning that if the simulation is somewhat accurate such that a player doesn't notice it or it doesn't really interfere with the enjoyment of the game it doesn't have to be perfect. I have played a lot of KSP (and only minutes of Space Engineers) so I will use KSP as an example of the optimizations that could be taken.
KSP defines four basic states:
- Stationary on the ground.
- Moving across the ground.
- Flying / in the atmosphere
- In the vacuum of space.
Generally speaking if something is stationary, on the ground and a long distance from the/a player it doesn't require physics processing - it can be assumed that when a player comes back in range the object will still be where it was.
As such it's position can be given in different co-ordinate systems the simplest/most accurate may be a rotating Cartesian (XYZ) coordinate system relative to the center of the planet, i.e the reference frame rotates synchronously with the planet, so all distances can be calculated accurately and no frame to frame adjustment need to be made for any stationary objects.
Typically objects in space around a single body are on an orbit (technically a conic section) as such you can define the curve of the orbit - using something like Keplerian coordinates then calculate the position given the current time since the game started - the inaccuracy will be related to the precision of the Keplerian coordinates themselves.
If an orbiting ship drops into the atmosphere you will need to apply aerodynamic drag to it, hence an approach may be to switch the way that calculations are performed to instead track velocity through the air and height above the ground.
Finally when the ship gets close to the ground you probably need to switch to absolute positions so that you can rendezvous with objects on the ground.
In KSP this final transition appears to happen around 2.4 KM - I am not sure if this is an AABB or just a spherical check. Anyway the point is that KSP does very few calculations for most objects and only really cares about the precision that the player would see/notice.
Finally KSP simplifies universal physics:
- The sun is stationary.
- The planets and large moons all orbit on rails - their exact position is always known given the amount of time since the start of the game.
- Only one large body affects spacecraft (the closest one) be that: the Sun, a planet or a moon.
- Hence spacecraft orbits are defined relative to that body.
- All large bodies, except the Sun define a SOI (Sphere of influence) when a spacecraft exceeds this, the body affecting them gravitationally changes to the next outmost body Moon -> Planet -> Sun.
TL;DR - At any given time exact positions of most objects in the universe are irrelevant a rough position is good enough.
Only objects (including the ground) that are very close (2.4 KM in KSP's case) need to be calculated accurately.