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Yes, this type of adaptation of speech sounds between words is normal and common. What you describe as hearing "allí esta" pronounced as "all'está" is a normal and typical in ordinary speech.
How much adaptation of speech sounds depends on the level of formality of the conversation: the less formal/more casual, the greater the amount of adaptation you can expect to hear.
Adaptation of vowels across word boundaries is very common:
a. neighboring identical vowels almost always merge into one vowel, although a careful speaker may hold the vowel for an extra long time.
b. two dissimilar vowels may merge into a diphthong, or one of them may get dropped, although a careful speaker may give both vowels their full values.
c. The consonants "ll" "y", and "ñ" always absorb the semi-consonant "y" from the beginning of a following diphthong or triphthong.
In the case of "allí está", it's possible for a speaker to pronounce the "í" at the end of "allí" and the "e" at the beginning of "está" as the diphthong /ye/. Because the diphthong follows "ll", the beginning of the diphthong merges with the preceding "ll", and the result is what you report hearing.
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