Salam dear questioner and thank you for your question.

The simple answer to your question is that God is physically in heavens but His knowledge encompasses everything.

According to Islamic sources which is based on the Quran and authentic tradition of Prophet Muhammad (peace be upon him):

“Allah the Almighty has told us that He is in the heavens:

 

{Have ye taken security from Him Who is in the heaven that He will not cause the earth to swallow you when lo! it is convulsed? Or have ye taken security from Him Who is in the heaven that He will not let loose on you a hurricane? But ye shall know the manner of My warning.} (Al-Mulk, 67:16-17)

Additionally, the Messenger (peace and blessings be upon him) told us that a slave girl was a believer when she told him that Allah the Almighty was in heaven. It is narrated that Mu`aawiyah ibn al-Hakam al-Sulami beat a slave girl belonging to him for being careless in minding his sheep.

Then he regretted it, and came to the Messenger of Allah (peace and blessings be upon him) to express his regret and ask for his permission to set her free. The Messenger (peace and blessings be upon him) sent someone to call the girl and asked her:

“Where is Allah?” She said: “In heaven.” He asked, “Who am I?” She said: “You are the Messenger of Allah.” He said: “Set her free, for she is a believer.” (Muslim)

The phrase “Allah is in heaven” does not mean that He is contained by its physical dimensions—Glorified and Exalted be He far above that.”

However, your question implies that if God is somewhere then why can’t we see Him? The answer to this question is in the Quran. When Moses (peace be upon him) requested to see God in person the reply was:

{And when Moses came to Our appointment and his Lord spoke to him, he said: “Oh my Lord! reveal yourself to me that I may look upon you!” He replied: “Never can you see Me (in this world). However, behold this mount; if it remains firm in its place, only then you will be able to see Me.” And as soon as his Lord unveiled His glory to the mount, He crushed it into fine dust, and Moses fell down in a swoon. And when he recovered, he said: “Glory be to You! To You I turn in repentance, and I am the foremost among those who believe} (Al-Aaraf, 7:143)

The above verse is simply telling us that we do NOT have the physical capacity in this world to see God in person. If God reveals Himself to us, we would die. However, the dwellers of Paradise will be able to see Him since God will give them the physical ability to do so as mentioned in the following verse:

{…and are oblivious of the Hereafter. Some faces on that Day will be fresh and resplendent, and will be looking towards their Lord;} (Al-Qiyama, 75:21-23)

I hope this helps answer your question.