I have tried using the Apple Watch Music app to transfer downloaded music files from my iPhone 11 Pro Max to my Apple Watch for offline listening. Series 6 running Watch OS 7.0.2 (clean install, not restored from a backup). Despite a 32GB capacity on the Apple Watch, I'm getting the following error when I've downloaded 11 albums and 1 playlist. The songs have bitrates of 256kbps:

The total space that these song files occupy is 2.7GB. I've spoken to an Apple Support specialist, and Apple Watch isn't supposed to throw this error until media storage reaches 8GB total, which still seems like a small amount given the 32GB capacity of the device. It's possible this cap was implemented when the watch was a 12GB device, and the throttling code hasn't been updated to reflect the new capacity.
Unfortunately, it's unlikely that this bug will get fixed, as the support specialist was surprised to hear of this issue, and the developers enlisted seem to think it's a hardware issue, not an OS issue. But if you have experienced this throttling and would like to get a fix in the queue, please reach out to Apple Support.

The total space that these song files occupy is 2.7GB. I've spoken to an Apple Support specialist, and Apple Watch isn't supposed to throw this error until media storage reaches 8GB total, which still seems like a small amount given the 32GB capacity of the device. It's possible this cap was implemented when the watch was a 12GB device, and the throttling code hasn't been updated to reflect the new capacity.
Unfortunately, it's unlikely that this bug will get fixed, as the support specialist was surprised to hear of this issue, and the developers enlisted seem to think it's a hardware issue, not an OS issue. But if you have experienced this throttling and would like to get a fix in the queue, please reach out to Apple Support.