Town
I think small-wheel bikes are great for dense, urban areas. i am talking primarily about ISO406, but ISO305, 349, 355 & 451 apply to in varying degrees. Why?
1. physical size. they are literally smaller. they fit and go where bigger bikes can't. if they fold, the advantages are even greater.
2. sociability. due to their uniqueness and size they are more approchable and less intimidating. people will strike up conversations and ask about the bike. perhaps because many view them as toys, people won't object to riding them or bringing them in in places where big bike would be verbotten. Think a narrow, crowded, dense Asian street market.
3. maneuverability. they are very agile, with small turning radius, and lively sterring. their small wheels means they accelerate like a jackrabbit, which is great in urban stop & go.

Conversely, for these reasons, i do not think touring bikes with their big 700c wheels, long wheelbase and their purpose-build 'seriousness' are ideal urban rigs.

Finally there are cities, and then there are cities. my experience and comments above relate to truly dense places where I've lived such as NYC, Mexico City, Jakarta and Singapore.