In my game (the one from above with the 2 FE neighbours), so far so good. I wanted to test going tall, and tbh having zero expansion room to the sides has forced much of that anyway. I have 3 worlds and 4 frontier outposts, and am slightly more powerful than standard empires near me. I just beat ones and forced them to cleanse 2 planets to give me more room for Outposts to expand my borders.
It has helped that i got lucky with research planets...between that, Discovery and the very low Unity/Research requirements for low planet/Pop empires, i'm advancing a lot faster than i would expect, and most neighbours are Inferior to my tech level.
However, as expected my naval cap is perilously low. it's enough to beat single races, or 2 at most (during my expansion war another neighbour attacked me....managed to pull back, kill his fleet at which point he surrendered with mutually no demands), but a Crisis or Federation, let alone the monster FE near me, would crush me. And unfortunately i can't see many ways to fix that with a tall empire until i can start spamming habitats.