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Could I still use a 16-char onion address for a hidden service if I am more concerned about being able to generate a nice "vanity" onion address than hiding the physical location of the service? Does using Version 2 addresses have any other negative implications other than the probability of deanonymization?

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You can use version 2 onion addresses and they are currently supported. However, from version 0.3 of TOR, if you want to run a hidden service, it will generate version 3 onion addresses. For the aim of the version 2 addresses, you should use TOR version 0.2.

As claimed in metrics.torproject.org the number of version 2 onion services are falling down. Therefore, I guess that they will be unsupported after some time. Onion Addresses

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That's wrong, default is still V2, current tor version creates V3 only if you specify you want that in your config. about Vanity-addresses, there is a generator for vanity V3 addresses, too. See https://github.com/cathugger/mkp224o

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  • Tor generates v3 onion services by default (and did back in May 2019 as well). Tor v2 services have been deprecated and will be effectively removed from the network in October 2021.
    – Steve
    Dec 28 '20 at 18:22

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