Space, as you have described it, is at a premium for alot of us. Unless you are fortunate enough to have one of those humongous basements I have seen in the 55 and older homes, you may have to resort to some of the tricks pointed out by Mike.
Or, you can do what so many have done in the smaller scales. Build a diorama. You might decide to model a section of railroad that serves a couple of industries. A lot of action can take place, even in a limited space.
