Toddler-friendly grassy area

Considering drought, artificial grass could be nice. There is a natural turf made with coconut fiber and cork.  Dimondia is a drought tolerant grass alternative. Do you have trees? Hammock is fun for little ones as well as bigger kids. Trex deck is softer, so when kids fall, which will happen, it's better than brick. Toddlers don't need a huge space. When our child was 0 - 4 years old, we had a tiny yard but we used every inch. We put variety of sand and water play area against the fence. On the other side of the fence, we set up art area for painting.  We had pots that our child used to "garden" and plant things. Sometimes they grew and fruited. Sometimes they didn't. We put a small playhouse that's made of plastic and big enough to fit 2 - 3 toddlers or one and a small adult (I'm 5'3''.)  A little patch of grass (the size of a king size bed) which was surprisingly big enough for 2 - 3 little toddlers to play on. We planted things that were child friendly -- they could withstand picking and crushing. If you have a space to put a trampoline (you can start with little ones for toddlers), it'll give you years of use. If your hardscape is flat, your child will enjoy using riding toys and soon balance bikes. Our friends also had a small yard and they didn't have any grass but they put climbing holds on the side of their shed in the backyard and put mulch over a rope bridge on the ground from the shed to their one big tree in the backyard.  They also put a slide into their sloped yard and a climbing wall.  Good luck!

We tried a grass lawn a few years ago, but it was a pain to cut and to keep watered. Plus, as you say, drought! Fortunately, I finally found a native groundcover that's highly steppable - it's called Lippia Reppens or Phyla Nodiflora. Once you recognize it, you'll see it's popped up all around the brown grass lawns around here, and it does so well. Bees love the little flowers too. I got my starts at Watershed Nursery, but you only need a few to start, they trail all over. 

We had some landscaping done last year that removed our similarly uninviting 'grass' and replaced it with dymondia, which I had never heard of before moving here but I take it is fairly common? It took a couple months to fully grow in, but I love it.

We did a kid-focused yard redo last year, thinking about our toddler son and our nanny share. The yard is about 2/3 new sod and 1/3 a playset (swings, slide from a tower) on top of rubber mulch. The grass is already mostly dead but the rubber mulch and playset was so worth it! I knew the mulch would give the ground a lot of cushion and make the playset safer, but I have been shocked how much the kids play with the mulch itself. They dig in it like a sandbox, they make "cakes" with it, they haul it around in buckets. It looks like regular mulch but it's safer and easier to keep clean. He uses it every day for now so I'm not sweating the fact that he'll eventually grow out of playset. At least for myself, I'm waiting to hire a landscape architect to put in a beautiful stone area and maybe turn the lawn into a garden area until that point. Note: the kids use the mulch area and playset (my son, nanny share kid, the loads of neighborhood kids we've made friends with because they spied the swings) way more than the grass. The main thing we use the grassy area for is putting out a baby pool when it's hot.

The concrete area may seem dangerous with a new walker, but don't discount having a safe enclosed spaced for riding scooters and pulling wagons as she gets older. Our patio area could use a redo aesthetically but serves its purpose for scooting and because it's not pristine I don't get uptight about kids chalking on the ground or doing any of their art projects there. I also love the suggestion about the pots for gardening. We have a weird built in rocky area that we filled with succulents and the kids have fun "gardening" too.