How about an area rug?

Definitely a rug. If the map is going to stay then getting a multi-colored rug with pastel-sherbert colors would be fun.

Peel and stick wallpaper in the niche would be good too.

Floor pillows might work out well.

btw, if you're mildly crafty and have the time, you can also use peel stick wallpaper to makeover a cabinet

I hope you understand just showing you modalities, not suggesting you use all or any of these particular patterns or all together. Solid colors for rugs or painting the niche, using dark or primary colors not just pastels would work too

Your ceiling fan is woefully undersized for the volume of air it needs to push around, & the stem is way too short.

You could paint the back walls an accent color and pick it up in your furnishings in the loft.

These are slipcovered sofas from IKEA

Thanks for the ideas, everyone. I generally don't like putting rugs over carpet, though I know that is a popular option. Find a color for the insets looks like it would have a big impact, so I may lean in that direction!

Figure out if you are going to keep it as a kid's play space or possibly use the room as a family room? If you are going to keep it for the children, I would paint the wall a neat accent color where the entranceway is on the left side wall. I would tie that together with a nice area rug===something colorful that has the same color as the painted wall. Maybe a nice shade of apricot or even a pale yellow or a lime green. I would put some big stuffed animals in there and hang some shelves on the walls. You could get a colorful throw for the sofa. If you are going to use it as a family room, I would mount a tv over the piece of furniture in that inset and put the couch facing the tv. Get a coffee table and paint the entire left wall a cool accent color. Get a throw for the couch and some throw pillows for the couch and add some comfortable swivel chairs towards the tv. For the back wall you could place the table with chairs and add a credenza against the wall or some low book shelves.

I think rugs over carpet can be a tripping hazard and I just imagine tripping and careening over that railing.

I'd find a pallet of colors that you like to accessorize with for pillows, throws, desk seat cushion, lamp, hanging light cord, toy bins, bean bag chair, nook paint color, and large artwork to hang in nook, low coffee table to sit on floor and play or draw. Here are examples in blues and turquoise.

6W Desk Lamp, Blue · More Info

Links Linen Pillow, 18"x12" · More Info

Designart Geometric Vortex Ii Modern Framed Wall Art, Gold, 30x30 · More Info

Ponce Outdoor Patio Bean Bag Lounger, Light Blue · More Info

Safavieh Landra Fringe Throw Blue/White · More Info

Commercial Grade Crystal Teal-Blue Metal Indoor-Outdoor Stackable Chair · More Info

DII 10" Rectangle Modern Fabric Medium Burlap Ikat Storage Bin in Teal Blue · More Info

I would advise to paint the back wall entirely - two story from downstairs to include the loft space.

Paint the niche downstairs and the niche in the loft a coordinating color. It would look amazing! Imagine going upstairs and and seeing that elevation with a color. It would also connect the open spaces and compliment the architecture. I feel if you just paint the niche, it will not be what you are looking for and look contrived.

Add big colorful floor pillows.