An RPG set entirely in or around a city seems pretty sweet to me (Disco Elysium anyone? Other examples of which I'm unaware?) and would fit Larian's design sensibilities.
Most cities are densely packed with points of interest linked by passageways; this fits Larian's maps to a tee. Most city dwellers are random unremarkables (not trying to be rude ^^ just saying there are more mayors per capita in the countryside), as are Larian's protagonists.
The thing that would be coolest to me would be seeing the city evolve between acts. Instead of building 7 giant maps of different biomes (as you might see in a typical RPG), Larian could build 1 map for the city in Act I, 2 versions of the city map for act II, and 4 for act III, letting the city change with the player's decisions.
Another benefit would be follow-through with NPC arcs. Where's such-and-such from Act I? Close to their home in the city, unless a story beat dictated otherwise.
As OP mentions, optimisation might be an issue (imagine loading all those inventories at once!). But the city doesn't need to be that big or completely seemless. It needs to be alive and thematically relevant.
