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Option 2 for sure. A longer space is better.
Loose a couch and get portable seating for guests. Target has rolling, padded cubes that are comfy to sit on, can be moved around the studio easily for convertable space and has storage inside for mic cables, mics, etc.
I had a low argosy rack three bays wide. I ditched it and got a real tall rack on wheels. My space is close in size to yours and more than 5 people in the room at once sucks. You have to have room to move around when multiple bodies are in the room so keep your room as flexible as possible.
RH
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