good grief. There has to be a better alternative. Can it be moved into the attic without too much effort? Or, check into replacing that with a tankless version that could perhaps be mounted outside so you can actually use this valuable space.

Having just said the obvious, can you make it look like a cabinet? For instance, create access panels with cabinet doors and if you need access from the top, a hinged countertop? Does it need to vent into the hallway? Is this even installed per code?

Making into a cabinet was my first thought. It is the easiest and cheapest option. My concern with that is that it may make it feel too crowded if I go all the way to the ceiling, but it may look strange if it goes only part way up. As far as I know as long as you can take it out to replace it, it should be fine. So making the side a door or like you said hinged top would be ok.