These two, and my granddaughter, are HOT for trthere they have remote Thomas sets and fully engage with my layout. Oldest is just shy of four. I know a room has been designated (big house), but don't know how much of the room I will get, but certainly more than 5x9.
There's an H.O. layout designed by Scott Perry called the "Heart of Georgia." Scott's concept was to go beyond the "4x8 oval" and make a more operations-oriented loop using a single sheet of plywood. The trick was cutting the plywood into 1'x4' pieces, then cutting two of the pieces down to 7' long and slicing the 1' squares into two triangles each to fill the inside of the corners. The result was a layout measuring 8'x9' that had broader curves and space for more industries. That could be applied to an O gauge starter set. Obviously, you wouldn't have as much track, but that could be worked out. Here's a picture:
Here's how it would look done in O gauge using FasTrack. The interior spur at the lower left comes off an O-36 turnout with an 11.25-degree O-36 curve extension. The mainline usins O-48 curves and turnouts.