Why can't they just take some of the space for key items and make it for regular items?
Because the "space" for key items is not the same thing as the space for regular items. It merely looks that way because they wanted a way to show icons for your key items in the same way as it does for your normal items. Also, if you have enough quests active, you definitely can have close to that many key items, too.

Your request makes about as much sense as asking the devs of FFXI to take away key item "space" from there so we could have more inventory. It's two totally separate systems.