>Is it just lost in thin air?
Sort of.
>Lost as heat even though the device is not used?
Yes.
The same thing (as in, the same chamical reactions) happens as when it discharges normally, but no useful work is done. It’s just pure heat, poof, gone.
It’s because a rechargeable battery which is disconnected at the contacts is still connected internally. It’s usually insulating enough compared to the metal wire connection not to make a difference in normal operation, but it can still internally discharge over time. And depending on the device, it might not be really “switched off” and still leak current through the electronics.
Depending on the construction, non-rechargeable may or may not have that issue. But it will still take a long time and the manufacturer would include ot in the shelf life if it occurs.
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