I think 8-bit/16-bit retro games were kind of at the apex of 2D sprite game design, and many of them were quite lovely, hence the nostalgia.

The PS1 3D games look worse when you look back at them, because they were not really the next logical increment of 2D gaming, but the first step into 3D. So more like the Pong, Asteroids, etc of the 3D era. They were exciting at the time as a glimpse of where things were going, but objectively they looked pretty bad.