Is it permissible for the Imam to pray in the first row with the congregants without being in front of them due to the small size of the mosque?

The Sunnah is for the Imam to stand forward and for the congregants to line up behind him, because the Prophet (peace be upon him) used to do that. An exception to this is the Imam of the naked, who do not find anything to cover their awrahs (private parts); in this case, it is recommended for him to pray in their midst so that they do not look at each other's awrahs. If the mosque does not have enough space for the Imam to stand forward, there is no harm in him standing among them, because his standing forward is a Sunnah and not an obligation, and the benefit of gathering for prayer is greater.