To show that $ALL_{\mathsf{NFA}}$ is in $\mathrm{co-NSPACE}(n)$, we must show that the complement $\overline{ALL_{\mathsf{NFA}}}$ is in $\mathrm{NSPACE}(n)$.
The complement is
$$\overline{ALL_{\mathsf{NFA}}} = \{ \langle N \rangle \mid N \text{ is an NFA where } L(N) \neq \Sigma^* \}$$
To show that $\overline{ALL_{\mathsf{NFA}}}$ is in $\mathrm{NSPACE}(n)$ we therefore need to devise a Turing machine that, given an NFA description $\langle N \rangle$ can tell us if there exists an input that $N$ will not accept.
Essentially, the machine will nondeterministically guess a string $w$ and verify that this string is not accepted by $N$. Our machine may guess the wrong string, but remember that the machine is nondeterministic -- as long as it is possible to guess a string with this property, the machine will accept $\langle N \rangle$.
To guess such a string $w$ and check that the NFA does not accept it, we need to explore all the possible computations of $N$ on $w$ and show that none of them will lead to an accepting state. This does not require us to construct an equivalent DFA using the subset construction; doing this would require more than linear space. However, even just storing all of the computations of $N$ on $w$ on the Turing machine tape will require more than $n$ tape cells.
The trick is to guess the string symbol by symbol and keep track of the sets of states that $N$ could possibly be in after it has read a symbol. If $N$ has $q$ states, there are $2^q$ such sets of possible states. We start with the set $\{ q_0 \}$ and guess a sequence of $2^q$ symbols. For each symbol that we guess, we record the subset of states that can be visited from any of the states that $N$ could be in now. We can keep track of this subset of possible current states using $q$ bits (represented as $q$ cells on the tape). This is linear in $n$ where $n$ is the length of $\langle N \rangle$. This description must at the very least list the states of $N$, so $q = O(n)$.
If the set of possible current states that we are now in does not contain an accept state, then we have found a string that cannot be accepted by $N$. We may have to guess $2^q$ symbols, since each symbol could in principle lead us to a new set of possible current states that had not been seen before. But once all sets of possible current states have been examined, we can stop. We can count to $2^q$ in binary using no more than $q$ bits. Again this requires no more than $O(n)$ bits.