This gigantic update space demand is absolutely bizarre. I can't imagine what's going on there. Here's more confirmation of the issue:I'm running Catalina in VMware. I used the default disk size of 40 GB, assuming that would be enough for a system with no App Store or 3rd-party software installed. Wrong. The 10.15.1 update said it needed 18 GB.
Mr. Macintosh said:What’s New in the macOS Catalina 10.15.1 Update (19B88)?
... First thing to note is the SIZE of the update! The Point Update clocks in at 4.49gb!!! That’s over 50% the size of the main installer app! (The full installer is 8.63gb).
... When you have an update that is almost 5gb in size, you also have to take in to account how much extra free space you will need. For this update you may need up to 20gb of free space to even install the update.