The answer is pretty simple - don't make it interactive. As
@RSoxNo1 mentioned above, you can incorporate all the well-known elements of a Mario Kart race into a passive experience.
Also, I get that space was an issue for a thrill ride, but we also don't need to go as fast as Test Track/RSR either, so it wouldn't need to be quite as big. But if they still needed less space, I feel that the Spider-Man ride system would be much more apt at recreating the experience than this. Yes, you would then open up complaints about re-using that ride system, but it really is quite versatile.
Since they were gung-ho on making an AR experience, I think the videos with the goggles off demonstrate that it's a decent slow-moving Mario themed dark ride, but again as RSox said, it's not Mario Kart. This could have, instead, been, say, a Luigi's Mansion ride, or simply a ride where you use a fire flower "gun" to shoot fireballs at enemies and wrack up points. That way people aren't let down by their race-themed ride going walking speeds around small rooms.