Lower the tv so it’s fully under the windows, maybe over a console so electronics can go on shelves. Put kids toy storage under the overhang area, plenty of space there. Done!

I agree with plf12652. Bring the TV down and put it on a stand.. BUT... with kids make sure if has a strap to secure it to the wall to prevent tipping. Then fill in the area under the single shelf with other matching shelves ( or replace and buy all matching) to hold toys. If you have large toys, like play work benches, or big kitchens etc, then forget the extra shelves and put the play centres under there so they are out of the way.

I'd be tempted to install closed shelves/storage under the single shelf (so it looks like a built in cabinet) and get the toys in there

Hard to tell the layout based off the photos. Is there furniture in this space? a sofa? Currently it appears to be a play area with a large TV. Can you share what furniture needs to be incorprated in the space? Take some photos of the other side not seen in the pictures by standing at the TV an shooting a photo from there. Stand in the hall and shoot a photo as you enter the space etc. Measurements of the room, TV, opening with shelf, furniture items.

I will say this if the TV must stay where it is it needs to be lowered below the windows and I would do a long floating console under it. Ikea makes a great one. The alcove with the single shelf. If the TV can't go there use this as a great space for storage. Add additional shelves and get baskets to house your kids toys and line them up on the lower shelves you add then style the upper ones with items and greenery. More can be addressed once the questions above are answered.

This is how you’d enter the room. Tv needs to stay there but I agree with moving it down.

Can you draw a to scale plan of the whole space? It looks like you have plenty of room to have both a dedicated play area and sitting/tv with rearrangement of existing furniture and kids toys. Understanding of course that the kids stuff will always migrate into all other areas :-) Where do your kids gravitate to? The side where the small wood table and chairs are or the side closer to the TV? Figuring out where the division between the two areas might be your first step. If they are constantly grabbing toys from the far end and bringing them to where the little table is, then creating a toy area where they don’t want to play is a bit of a losing battle!

Such a good point re the play area. They gravitate to playing right in the middle of the living room on the rug or right in front of the fireplace on the tile (since most of their toys are stored in those cabinets. More photos for reference.

Great space Amanda!! For sure save yourself and back a workout & make up a to scale (one square = one foot) blank floor plan on graph paper measuring out windows, fireplace, doorways etc. with cutout templates of your furniture including kids items. Move the cuts out around on the graph paper until you find a layout that works best. Now that I see more of your space, I would investigate creating the TV watching area at the far end and put your TV in the alcove below the shelf. Not sure which of your sofas would work better in that area (beauty of trying different layouts on the graph paper first!) Then, since the kids prefer the space in front of the fireplace, you already have that great built in unit (they prob like it over there as it’s closer to whoever is cooking in the kitchen) you can create a second seating area in front of the fireplace with the other sofa and 2 kids chairs. Do the graph paper exercise first with measurements of your sofas & post that so we can help you find the best layout on paper.