Japanese culture has different ideas than the West when it comes to preservation vs. rebuilding structures, which is ultimately rooted in the fact that it’s an island with typhoons and earthquakes, and thus architecture tended not to last long, historically at least.
This is also why you see so many articles online about buying cheap houses in rural Japan: because typically new owners will demolish old buildings like this rather than refurbish them in the way a building is in Paris or London.
My guess is that the Nagakin became a little too retro and run down, and the lack of this preservation culture meant that no one really wanted to live there. It would probably still exist and be in good condition had it been built in say, London - like The Barbican, for example.
I think it's less of the size, and more of other things like amenities, and imo, those tiny windows.
I have lived in (modern) rooms not much bigger. For someone living by themselves, it's not bad at all. And lots of people do live in such sized spaces - eg hotels, or cities like NYC.
I have no idea how expensive the rent there was, but if it was low enough, in a large city with enough people on a tight budget, lots would be interested. Heck, with the current housing shortage in many places (like NL) where even getting a place to stay is a challenge, there would definitely be takers for such a place.
Apparently a sufficient number of people don't want to live in microscopic hamster cages, no matter how cool they look, not even as pied-à-terres.