I'd first point out something about the "bad" examples you give: I've seen pictures of the outside, but I've never actually been inside any of them. Have you been into the Stata Center, or Simmons Hall, or Fallingwater? If you have and they're terrible inside, then I guess that's that; but I've been into a lot of buildings that look boring on the outside but are still barely functional inside. It's certainly possible to trade off aesthetics with functionality, but it's not necessary. You have to use custom furniture in Fallingwater ... but just because it's harder to replace, does that mean you shouldn't use an eminently comfortable chair that fits in perfectly with its surroundings, slides under the table like they were meant to be together (they were), and is beautiful to boot? The Stata Center look strange from the outside, but floor plans look pretty normal on the inside - rooms are rectangular, corridors just bend at angles slightly different from 90 degrees.
As to your complaints about fantasy worlds, I have to point out that we create fantasy worlds to scratch different itches. Do we aim for verisimilitude, for a world that looks enough like our own that the players can project their expectations of real-world actions faithfully onto the conworld? Do we aim for aesthetics, try to create a world that is strange and beautiful and wondrous? Do we aim for a reflective world, through which we can explore bigger issues? And I'm sure there's other considerations to take into account.
So, from your post, elves living in trees. From a functional viewpoint, this is a bizarre idea: it's not for nothing that hardly any societies throughout history, and none past the stone age, have lived in trees. It's hard, it's dangerous, and you gain hardly any advantage against things smarter than wild animals. If the players expect their real-world logic to work in the fantasy world, they'll immediately notice the same drawbacks you did and burn the forest down rather than besiege the elves. From an aesthetic viewpoint, though, it might make more sense: elves aren't human, they're something strange and wondrous, they're closer to nature and live in tree-cities built of gossamer and fog! This might also work from a reflective viewpoint; maybe the GM is using these elves to explore environmental or alienation-from-nature themes in the world building.
The explanations traditionally given for "but why?" (like "Magic!") are usually justifications of choices made for aesthetic reasons; and this isn't a bad thing! It lets the players experience something built for aesthetic or reflective reasons and still have some idea of how things will work from a functional perspective. It makes players push their willing suspension of disbelief a little further; and, while it may be a little too far for a player expecting hard verisimilitude, it might not be too far if the players are open to more aesthetics or reflection on larger themes.
tl;dr: You can have aesthetics, and functionality, too. But as long as your audience is okay with it, you can give up some of one for some of the other.
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