The church I grew up in was a suburban start-up that began with an "all-purpose room." (Yes, that was its name.) I remember a fairly ugly grey room that we used for worship, suppers, and even the square dance club. There was no decoration to speak of, not because of our theology, but because of our finances and the general idea that we wanted a room that could be used for anything. We sat on grey metal folding chairs.
More recently, I visited a church that took this "all-purpose room" idea to the max. It had a stage, a sound booth, a projection screen for the song PowerPoints, and basketball hoops that could be cranked up to the ceiling. The floor was an odd tight carpet that was marked for a basketball court and (as one member proudly told me) actually worked quite well for dribbling the ball.
Another church I visited years back was one of those huge mega-churches with thousands of members. The main room had theater seats (really good ones), a balcony, and a really high-tech stage.
I don't think any of these three groups would be comfortable calling their room a "sanctuary." People gather there to eat dinners, to dribble basketballs, or to be audience members.
The concept of "Holy"
The basic idea is "set aside for God." It's the reason you don't use a communion chalice to fetch water for a plant. I have to admit that, because of my background, I'm still struggling with "holy," but there is something beyond simply preserving the finish on the chalice that keeps me from using it as an ordinary cup. (Yes, Eucharist would still be Eucharist if the wine were in a common teacup, but something did change in that ornate drinking vessel when it was blessed and set aside for its current purpose.)
One of the odd things about us Episcopalians is that we use a lot of "stuff." Wine, water, bread, oil, and fire are all part of worship. People who are leading worship wear special clothing. We kneel, we bow, we cross ourselves. Once a year we get ashes on our faces. When I was going for surgery, the priest used holy oil (not just any oil from the kitchen) and made a cross on my forehead. It's not just a "head trip" in which we try to put ourselves in an "attitude of prayer." We actually get down on our knees.
C.S. Lewis said, in The Screwtape Letters, that "Humans are amphibians...half spirit and half animal...as spirits they belong to the eternal world, but as animals they inhabit time." So I think at least one reason for "sanctuary" is to grab the attention of our spirit side and allow our animal side to be quiet for a bit. The decorations, the music, even the smells can help with that redirection.
Who is the real audience?
When I was a boy, I was amazed by Washington National Cathedral (quite a contrast with our "all-purpose room"). The beauty and the incredible craftsmanship were overwhelming. Everywhere I looked, there was some amazing little detail, often in places where the general public wouldn't see it at all. Years later, I was shepherding a group of Japanese high school students through the Cathedral, and the tour guide asked them all to lie down on their backs at the great crossing. She asked them what shape they were seeing. It took a while, but they finally got it: The Cathedral is an enormous cross. Then the next question: If the Cathedral is built in the style of the great European Medieval cathedrals, who can see this shape? Who can hover above it and look down on it?
So another reason for "holy space" decoration is not just the beauty or the attempt to shift the attention of the worshipper; In a real sense, God is the audience and the holy space is his space.