The role of ecological limits in regulating the distribution and diversification of species remains controversial. Although such limits must ultimately arise from constraints on local species coexistence, this spatial context is missing from most macroevolutionary models. Here, we develop a stochastic, spatially explicit model of species diversification to explore the phylogenetic and biogeographic patterns expected when local diversity is bounded. We show how local ecological limits, by regulating opportunities for range expansion and thus rates of speciation and extinction, lead to temporal slowdowns in diversification and predictable differences in equilibrium diversity between regions. However, our models also show that even when regions have identical diversity limits, the dynamics of diversification and total number of species supported at equilibrium can vary dramatically depending on the relative size of geographic and local ecological niche space. Our model predicts that small regions with higher local ecological limits support a higher standing diversity and more balanced phylogenetic trees than large geographic areas with more stringent constraints on local coexistence. Our findings highlight how considering the spatial context of diversification can provide new insights into the role of ecological limits in driving variation in biodiversity across space, time, and clades.