Forwarding address for DLR should be on the DLR Instances on the ESXi hosts, but DLR Control VM advertises this address as the next-hop to the Ospf neighbor Edge. Protocol IP address is used for establishing neighborship so resides on the Control VM.
OSPF Protocol Address in DLR
"The protocol Address is live in the Control VM. The Forwarding Address is on the ESXi host."
http://www.routetocloud.com/2014/06/nsx-distributed-logical-router/#Protocol_Address_and_Forwarding_Address
The same Forwarding IP address (and MAC Address) exists on each ESXi host. Which one of these ESXi hosts answers the packets sent from the Edge is the Esxi host that the Edge VM exists. After the packet is handed to this DLR-Instance, the rest of the forwarding may be thought as Vxlan logical switching, which the packet is sent to the ESXi host that the VM exits.
http://bradhedlund.com/2013/11/20/distributed-virtual-and-physical-routing-in-vmware-nsx-for-vsphere/
In the case where the DLR is running routing protocols with an upstream router, the DLR will consume two IP addresses on that subnet. One for the LIF in the DLR kernel module in each vSphere host, and one for the DLR control VM. The IP address on the DLR control VM is not a LIF, it’s not present in the DLR kernel modules of the vSphere hosts, it only exists on the control VM and will be used for establishing routing protocol sessions with other routers – this IP address is referred to as the “Protocol Address”.
The IP address on the LIF will be used for the actual traffic forwarding between the DLR kernel modules and the other routers – this IP address is referred to as the “Forwarding Address” – and is used as the next-hop address in routing advertisements. When the DLR has a routing adjacency with another router on a physical VLAN, the same process described earlier concerning Designated Instances happens when the other router ARPs for the DLR’s next-hop forwarding address. Pretty straight forward. If however the DLR has a routing adjacency with the “other” router on a logical VXLAN network – such as with a router VM running on a vSphere host (eg. ESR) – where that vSphere host is also running the DLR – then no Designated Instance process is needed because the DLR LIF with the Forwarding Address will always be present on the same host as the “other” router VM.
If Vlan is used for DLR Uplink, then Designated Instance is chosen:
http://virtualelephant.com/2016/11/22/nsx-dlr-designated-instance/