I'm pretty sure hundreds of people have had this same idea, but it's pretty darn costly to implement
VR and motion capture keep getting cheaper though, so maybe one day soon it would be feasible. Like you say though, you'd also need to rent a huge space to host the game, which would have to be close to a metropolitan area in order to get customers, which is another huge expense. Then on top of that, there's the actual game development part!
I had the same idea when I was a teenager, but as an FPS instead of a melee game -- other players could be in the same arena as you, and the VR goggles could draw 3D models for them using their exact poses, so they line up with reality. You could then play with a laser-tag gun, which is registering shots against their real-world body.
Having walls and obstacles in the arena would be fine, as long as your motion capture and VR tech is accurate enough that it can draw virtual walls in the exact same places as the real walls are.
To build this, you would need an existing, talented games studio that can build the software, and you would need a bunch of hardware engineers to concoct your VR environment for you. Each of those teams would then need millions of dollars in each of their budgets... And then you'd need to attract enough players, and charge a high enough price to make back your money.
At the moment, it's probably cheaper to scrap the whole VR part and just use reality, like Patient 0 did: