As long as there's room for every person present to be in their own personal "holo-bubble" it would work.
The trouble is, at a certain point, you've stopped making an immersive artificial environment and started just making an over-engineered VR system. Granted, this is mostly because it was an under-engineered concept that the writers just took at face value (nothing wrong with that! It's not their job to invent a real holodeck), but it seems if you wanted to update or rationalize the concept, without entering the realm of body-hijacking brain/computer connections the Federation seems understandably wary of, a better "holodeck" would be a pod, maybe about the size of a turbolift car (big enough for someone to stand in with their arms outstreched with a little extra room), and perhaps arrange them into a sort of arcade. The forcefields and gravity manipulation and holomatter can do the rest, and then it's practically the same as being in an over-stuffed canon holodeck, or even a holodeck with just two people who are standing fairly far apart, but it'd be a bit easier to implement. It also solves the problem of there being only a handful of holodecks on a starship for over a thousand people, when you can assume they'd be pretty popular.
You could do some interesting visual stuff, too. I'm imagining someone laying on a beach or field or something watching the clouds or taking a nap, and then someone opens the arch and appears floating a few feet above them (since they wouldn't have had room to lie down, the pod would just shifted the gravity around them so it seemed like they were, similar to
the endless hallway trick present-day VR uses). Then we rotate the camera to represent gravity shifting for the user, so the ground seems to pivot to become a wall and they're now standing facing the door. That feels like an appropriately showboaty, we're proud of how clever we are first season move.
How does this account for the periods (EaF, Homeward), where the wall is shown?
I think the standard fanwank is that in cases like EaF, the computer either was so smart it understood what Data was illustrating and allowed the rock to hit the wall rather than transitioning to a virtual rock, or it was dumb enough to be surprised by Data suddenly chucking a rock exactly where the wall was and wasn't able to adjust in time. "Homeward" is trickier, because in that case all the people would've been in an apparent area larger than the holodeck, while in Farpoint Data, Riker, and Wesley were all pretty close together, so the malfunctioning walls should've been distorted and weird (probably showing "ghosts" of people who were really standing there, but seemed to be elsewhere in the simulation).