If you are not a neat freak, these niches are not going to work for you. Theoretically, they could be storage, but it looks like more practical storage is what you need. Either remodel this into a practical closed storage unit, or (if you don't need the storage here) cover it over. Think of resale. If you're going to be here for the next five years and beyond, do what you want. If you're moving within the next five years, think of what would be the best for resale. Do some internet research for resale of living room fireplace design, or ask your local realtor. Also, ask trusted friends, coworkers, neighbors for advice.

How does the fireplace vent? A blogger removed an entire drywall fireplace surround in a vaulted family room and was able to scoot the gas unit back a couple feet to increase the clear floor space in her room and better accommodate a modern TV.

Here is some ideas how you can make shelving

Vincenzo · More Info

Why not just drywall the niches and then add logs to the one side (the lower side) assuming it's actually a wood burning fireplace?

Cascade Mountain Home · More Info