Through focus and improvisation, we talk to people, not at them. The further away people physically get, the more difficult it is to involve them in the scene. Those that sit in the front of the house are far more likely to speak freely than people in balconies, who may as well be asleep. In matters of space, less is certainly more. Doing a show 3 feet away from 30 people will have a greater impact than performing 30 feet away from a mob of 300.
People are accustomed to watching a performance, to quietly looking as the story unfolds.
If people are willing to break the rules of conventional theater and interact, the setting is of no relevance. It's rare to find a theatrical production that would work better in a broom closet than in Carnegie Hall, but interactive theater relies more on emotional depth than physical dimensions.