How much is the game held back by technical constraints?

[Absurdity]

It's not just technical limitation but also the way code was implemented into the game. Bad implementation, bad storage management and runtime all caused issues that we see today. Either devs just didn't think about it at that moment and wanted to deliver product as best as they can "brute force" or just didn't care. Now we see these consequences when they cannot save simple info on their servers so you can access them from anywhere. Wow did this way before in 2004. Now even for simple housing changes, they say "servers would crash".

My guess is the former.

1.0 shut down on November 2012 and ARR released in August 2013.
Even if we assume they had the idea to completely rebuild the game very early and were already working on it while 1.0 was still actively being developed, that is an incredibly short time to make an MMO, even less time to cobble a functional MMO version of the Luminous engine together.

I think it's highly likely that they just made sure the engine "somehow" worked and that absolutely came back to bite them as far back as Stormblood.