I am a staunch building supporter. One might call me Muad'dib.  Let me demonstrate what I used to do while waiting for WoM updates:

That is how I want cities to look. Up, not out.

-Upgrades would solve the food improvements system. One building that can be upgraded with improvements.

ex: Granary-->Mill-->Bakery-->Bread District (Unique citylevelup option)

-Barracks should be upgraded to be the fort for city walls, the training post, the command post, and other such things. I imagine the barracks starting out with the default tile and then being replaced with a variation on that tile as it is upgraded with more abilities. This how my personal mod, Robust Cities worked. I never released it to the public as it was made for a 1.1 WoM. But the buildings were epic and took up less space than the default ones.

-Blacksmith would upgrade to a forge and eventually you might get to make it an Underforge if you get a lucky draw at level five citylevelup.

-The city hub has a good leveling system, but I would like to see it have a path option to really make cities feel unique. One great option would be for the Palace to become an upgrade for the hub instead of sitting beside it. It could also be upgraded to a wizard's tower, a fortress, a throne of onyx, etc...

-Inns could be upgraded with the adventurer's building, a pub, bed n' breakfast, guild hall, or even the theater and arena improvements. 

I think you'll see that many improvements that are being placed side by side could easily be combined with very little effort. It would decrease the sprawl and even fit well with a 9 tile limit or 3x3 buildings per tile. Any way you go, this saves space and gives the player unique option for each city. Factions could even have special upgrades, like Tarth getting a Rogue's Den instead of a Training Ground or Altar getting a special Guild Hall improvement for the Inn. There is alot of potential as long as you plan the improvement system to have multiple paths for some buildings based on their surroundings. 

The final thing I would point out is that if we did do a 9 tile limit, what would happen if you had something blocking a tile? I would suggest that you make sure to have a system where the 9 tile limit is square, unless a resource or other object blocks a tile, in which case you should be able to take a tile adjacent to another. It will be very important to show the user which tiles he or she can build off of when the settle button is moused over. 

This is how cities should look: