have you thought about demoing out the raised portion? and just having a step down from the dining room instead, this would then allow you to put a sofa table and maybe a book case back there and just have it as a traffic path.

You need a focal point around which to gather the seating, so the electric fireplace is a great idea. My first thought is that there may be a contradiction of style between a traditional brick wall and a more contemporary frame TV/FP. If you're thinking real brick to the ceiling, that will be a cleaning nightmare with scaffolding, etc. to deal with. It is also not as flexible as a painted wall when you want to change the ambiance of your room. Here's something to consider.

Do your children also have toys in their rooms or are the toys mainly kept in this room? It may be helpful to go through all the kids' things and keep only what they're really playing with... I see multiple ride on toys that look to be the same basic size and serve the same basic function... do you need all of them? Perhaps you could keep just two- one for each child for those times they just can't share- and let the rest go. Speaking from experience, it is so easy to get overwhelmed by kids' stuff! For me, the less of it there is overall the less stress it causes all of us, kids included. When kids were younger we only kept two baskets of kids things in our family room- one basket of toys and one basket of books. Everything else was kept in their rooms. Of course they brought things out of their rooms but they also took those things back every night before bed. So perhaps reshuffling where their things are kept could be helpful in making this room more enjoyable for the grownups and less like a daycare center (as you said above).

I would make the tv wall more of a focal point. Using floating shelves is an inexpensive way to make a statement on the wall. Ikea has several options. You could add books, plants, artwork, collectables ect.. on the shelves to add interest, colour and texture. I'd also add a longer cabinet below the tv - it doesn't need to be floating. I'd remove the pet carrier or integrate it into the cabinetry. I'd paint the TV wall an interesting colour. You could remove the curtains on the door and use a self-adhesive contact paper that looks like etched glass for privacy. I would remove the picture from that wall and add 2 pictures above the couch - one on either side of the window. If it's possible, you may want to swap out the sectional for a smaller couch in the same fabric since it works for your pets. I would reolcate the black chair to another room. Since the space is small, you could add a very narrow sofa table with with power outlets behin the couch so you can add lamps if they are required. Although I love cutrain, shades would probably be a better option in your space. I'd add colour it compliment the colour of the entertainment- with a throw or throw pillows, in the fabric on the shade. I hope you find some of these ideas helpful.