Thank you all for the tons of good info!

Regarding closing in the water heater...

Since the current one is in the corner near the pedestrian door, I was going to build 2 more walls and hinge them at the wall that the pedestrian door is not mounted to and then again at the 90* corner of the box for ease of maintenance. Think of a bi-fold closet door on a much bigger scale.

I was wondering about ventilation if I decide to go with a gas water heater. Are there models out that use the double flue pipe that uses the center pipe for venting flue gases and the outer pipe for incoming air to burn? I thought that that might be a solution to the problem of ventilation. Would something like a through-the-door grate such as vertical interior (closet??) furnaces in some homes use be sufficient for ventilation? The garage door is rarely open because I don't park the car in there and I thought that the grate might stop or re-direct any breeze away from the pilot light.

Is there any such thing as an electronic ignition gas water heater? ie: no pilot light necessary?

We don't have power outages here very often but now, having said that, we will be plagued with them and more so if I do go with an electric water heater. I call it Jeff's Law.