From my admittedly limited perspective, putting Diagon Alley on the Upper Lot would be detrimental to the long-term growth of the park. By putting both parts of Wizarding World literally back-to-back, Universal would be concentrating their two biggest headliners not only in one spot, but in one spot at the very front of the park. That's a nightmare for guest flow, disincentivizing guests from going deeper into the Upper Lot, let alone making the hike all the way down the Starway. The eventual addition of Nintendo on the Lower Lot will certainly help balance the scales, but even so, having a 2-to-1 ratio of major themed lands on the Upper Lot vs. Lower Lot seems like a recipe for disaster. You want the emphasis to be on the Lower Lot, forcing people to go deeper into the park, passing the breadth of other attractions along the way. Not only that, but by putting Diagon on the Lower Lot with the Hogwarts express, you improve circulation between the two parts of the park, allowing people to enter and exit at two point instead of just one.
Aside from guest flow, having Diagon and Hogsmeade butting up against each other stinks on a theming level. Harry's journey into the Wizarding World is just that: a journey. He travelled from Surrey to London, and then from London to the Scottish Highlands, all the while getting further and further away both spatially and culturally from the world he knew. Obviously in a theme park setting, you can't travel quite so far - especially not in a park as small as Studios Hollywood - but in order to preserve at least some small part of that notion of journeying, the two lands should have to travel more than just a few yards to get between them. The trek between the Lower and Upper lots would be the ideal way to handle that, especially since there is a physical ascent involved in getting between the two areas. Sure, you could fake it, and have a stationary Hogwarts Express, but you'll always know exactly where you are, and the simulated journey will never have the same impact as the real thing.
The other downside is that by smushing both of these together, you box both of them in and eliminate the possibility for further expansion. If Diagon goes on the lower lot, Waterworld and the space behind Curious George could be used for further Potter expansions (Fantastic Beasts, anyone?). Why blow that right away on Diagon?