In a small space there may not be a place for a separate play room. But that doesn't mean a play area all their own isn't possible. Try creating a play nook, a corner or part of a room that holds toys, books, and art supplies.
I love this idea of turning a closet into a reading nook/kids private library. My mother would NEVER have been able to lever me out of it if I had one as a child. Who am I kidding...if I had one now I would still be in it!: