I haven't seen anyone argue with you that Wake needs an arena this large. We are all in agreement that fewer seats would be more appropriate.
What we are seeing right now, I believe, is the hidden danger of allowing a program to wallow in the doldrums for a freaking decade. You might assume that as soon as the team shows signs of being good again, all the fans would come running back. It doesn't work that way. People have gotten used to doing other stuff. A whole generation of potential fans; local kids, children of alumni, etc., have grown from being 6-8 years old, the age where you first start developing an affinity for sports and for a particular team, to being 16-18 years old - all while Wake has been completely irrelevant in college basketball. We have essentially lost those kids and it will be very difficult to bring them back.
Among all the Wake alumni that I know from my time at Wake, I am unique in that I still follow the team, watch the games, and care. My one roommate will occasionally text me about a game - but usually to make fun of us for losing.
We started with such a small fanbase, losing the ones we have over the last decade is disastrous. It is going to take some sustained success before we start seeing the Joel packed with loud Wake fans again - whatever the format of the arena.