The statement indicates that the flat is small. So, the answer must be a feature that a small flat lacks. A small flat lacks area. Thus, the answer must mean area.
Option A is incorrect. Air is not a feature that a small flat lacks. Also, it does not mean area.
Option B is incorrect. People is also not close in meaning to area. Also, it cannot describe a flat.
Option C is incorrect. Friends neither means area nor is it a feature that can describe a flat.
Option D is correct. Space in this context means area. Thus, it defines the feature that the flat lacks. Therefore, it is the best and correct fit.