After reading the neofag interview... I'm still not convinced.
In terms of size, FFVII was big, but note the "was". It was big for a game on the PS1 and needed 3 discs back then - although that may have simply been due to all the cutscenes. Nowadays though it's not like the game wouldn't fit on a 40GB single-sided or even a 80GB double-sided Blu-Ray, even with the fancy graphics. Just look at MGSV and Witcher 3: two huge-ass games that managed to fit and have some of the best graphics of this gen.
Now, as for development time, I don't completely disagree here. It makes sense that if they simply develop the game in chunks then they'd be able to release it steadily rather than waiting until it was all done. However, I'm not sure why this is really an issue. I mean would people be too impatient or distracted that they couldn't wait a year or two after its announcement for its release? They could have always pushed its announcement further to keep the hype strong when it released (and hope Kotaku doesn't catch wind of it and leaks it).
The biggest issue I think that comes with the remake, and the reason why I believe they have to make it episodically is due to what SE is currently producing. Sure, if they chose to make this one big release, development would drag on for a long time and they would be spending lots of money without seeing any return from it - that's what happens when you make big games. This is why, as a big publisher, you make other smaller games more frequently to give you the money you need to develop your larger projects. However, SE is already has a big game in development hell - FFXV. Making two big games at the same time would be ridiculous, even for a big company like SE.
Which brings us to why its really episodic - they're using the FFVII Remake to fund FFXV's development. Since XV is proving to such an investment for SE, they need an easy way to get money. So why not make episodic installments to remake a beloved classic that fans will no doubt eat up? Making it episodic means they'll get money more frequently, giving them a steadier flow of funds. Now, this isn't really a bad idea - in fact it's a very smart business decision, and may provide us with FFXV faster. The real issue though is that this FFVII Remake may not turn out to be quite big remake that a lot of fans wanted - instead, it's a chopped up Remake with some features like the overworld probably cut out to make sure they can get it out in a "timely manner". This isn't even getting to things like pricing, which could go horribly wrong in a lot of ways.
Of course, this is mostly conjecture, but it would make a lot of sense for them to do this. I never really thought that SE would make really give us complete a FFVII remake (remember, this isn't Square anymore, it's Square Enix) and this just confirmed my thoughts.