Offices and hotel maybe, but Palau is mandatory. They want to use it not only for the other sports Barca has, but also as a modern concert hall for additional income. Spotify as a sponsor will help the club to bring in all the hyped artists. The current Palau is too old and not designed for that.
First of all, it's not smaller. The compression ring, that will hold the roof will add additional 8m to the hight, so in the end, the new stadium will have the same height as the old.
Secondly, it wasn't possible to keep the 3rd tier for several reasons. One of them Andresito said, it couldn't hold the roof because it was not symmetrical (tribuna had no third tier, but the roof instead) and didn't have a compression ring. The other reason was, that it started to lose safety certificates. That was the reason, why we played half a season with a big hole in the 3rd stand, because they had to demolish that part, as it wasn't safe anymore. Despite the 3rd tier being newer (1982) than the first two tiers (1957), it started to disintegrate faster and had to be replaced anyways, because renovating it would have bought the clubs a couple of years max for a big amount of money, no one considered this.
And another reason is, that the old third tier made a modern new look and experience impossible.
So in the end, there was absolutely no way around it to demolish and rebuild it.