Proteins fold and function in cellular environments that are crowded with other macromolecules. As a consequence of excluded volume effects, compact folded states of proteins should be indirectly stabilized due to destabilization of extended unfolded conformations. Here, we assess the role of excluded volume in terms of protein stability, structural dimensions and folding dynamics using a sugar-based crowding agent, dextran 20, and the small ribosomal protein S16 as a model system. To specifically address dimensions, we labeled the protein with BODIPY at two positions and measured Trp-BODIPY distances under different conditions. As expected, we found that dextran 20 (200 mg/ml) stabilized the variants against urea-induced unfolding. At conditions where the protein is unfolded, Förster resonance energy transfer measurements reveal that in the presence of dextran, the unfolded ensemble is more compact and there is residual structure left as probed by far-ultraviolet circular dichroism. In the presence of a crowding agent, folding rates are faster in the two-state regime, and at low denaturant concentrations, a kinetic intermediate is favored. Our study provides direct evidence for protein unfolded-state compaction in the presence of macromolecular crowding along with its energetic and kinetic consequences.