In my own experience, the lack of privacy and sufficient relaxation is absolute hell. Even still, I continue to live here because of the unintentional lessons in regards to communal living. I think it is almost essential for anyone interested in founding a community to experience life in the residence halls of any university around the world.
Generally, the residents are unwilling to compensate one another's personal preferences in regards to quiet hours and bedtimes, but overall (at least at my school) there is a high level of awareness of community. The university charges every person in the entire building if any public furniture is stolen or defaced. This is definitely an effective way to form a sense of community. My only problem with this approach is it capitalises on negative consequences. But so far it has worked in preventing the destruction of public property.
The best thing about dorm living is the "umbrella of diversity" under which we all live. People from all parts of the world, from very different backgrounds.
Even still, there is a sense of isolation (at least for me) because of the lack of people with whom I identify. I have a roommate and I know my neighbours on each side (and most of the floor), but there are essential bonds missing in the formation of a complete sense of community. I suppose the housing department assumes students will form those bonds. Not in most cases, apparently.
I think the essential missing link is a desire to actually form a sense of community. Most students are probably unaware of the fact that they are essentially living a commune.