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Yea, in UA:D it looks like it describes stations.
Theoretically though.
Cramped quarters mean less sleeping space (hot bunking), fewer heads and showers, smaller galleys and wardrooms etc. It also means cramped fire control positions, turrets and engine rooms. Supposed to affect the performance of the crew long term while operating away from the base.
WW2 era KM design choices could be described as cramped, RN as normal and USN as spacious. But again different ships had it differently.
BTW, RTW2 also has a fourth level of this as a colonial upgrade, in my understanding it's airconditioning plant and extra stores of food and water.