... If you have any ideas about this, we'd love to hear about it!
Maybe it is just a matter of proper naming. Call it the 'useable space' of the location.
Initially all this space is taken up by nature, where plants grow and animals live.
When characters create (semi-)permanent structures in the location, like buildings, crop fields (necessary for using harvesters!), mines/quarrys, animal enclosures, maybe even improved roads, those take up space, diminishing the free nature left in the location. Each structure will have it's own size: a well takes almost no space, a stone quarry will take lots of space. Demolishing those structures of course will free the space for nature or other structures, and should be possible for any structure.
With diminishing nature space the gathering of natural resources will gradually become less effective, and less animals can be hunted there.
When characters live in a location, space management will naturally be an issue for all. The choice of which structures to maintain in the location is a community issue, there may be rules for it. Houses with back rooms are more space-efficient than separate houses. A nearby location can be devoted to farming and/or hunting. Living space will thus not be restricted to one location, but involves an area of locations.
Start with higher space numbers, allowing diversity in space use and making it feel less cramped. Tweak the numbers, so an average location size allows for an average village size, and a maximum location size can contain a thriving city (a true metropole will spread over several locations).
I think ...