The building codes in most jurisdictions wouldn't even allow such a thing, whether there would be demand for it or not. But the lengths people are willing to go for small apartments in top tier cities (NYC, especially) show that there is be demand in the right situations. Of course, the whole point of living in Manhattan is to not spend time at home.

But there are interesting experiments going on. Where I live (Toronto) has had a huge build-out of small ~4-500sqf bachelors that were hoovered up by flippers and mom-n-pop landlords. At the peak of the boom, they were selling for ridiculous prices ($800K+) and the poor build quality of everything from elevators (of which there often weren't enough, resulting in lineups and long waits) to water pipes that burst meant that savvy prospective owners stay clear.

There's a correction happening, but people don't want to unload their "investments" at below what they cost and since mortgages are recourse people can't just walk away.

In theory there should be demand for these units from the young, corporate owners, 2nd homes in the city, etc. But the prices have just not come down enough to make any of those worthwhile.

I don’t agree at all — plenty of college students, 20-30s somethings would love a space like this in NYC, SF, etc. at a lower price point than what’s currently available.

The limits seem to be from legal restrictions on minimum apartment size, not market demand.