Keep 'em separated

 One of the tropes of D&D, and fantasy RPGs generally, that I've come to dislike the most is the cosmopolitan society depicted in so many settings and adventure modules. It's arguably reached its apotheosis in modern iterations of Dungeons & Dragons and its close kin, in which not only dwarves, elves, and halflings, but orcs, lizardfolk, elemental-kin, half-demons, and even more outlandish beings regularly coexist closely with humans and each other, socializing, working, cohabitating, even interbreeding freely. Even in older products, as well as more recent OSR and OSR-adjacent material, however, the trope is in evidence. Try to think of the last human village or stronghold described in an old TSR or newer OSR product which actually featured a human smith instead of a dwarf. Setting aside that most wildly overused cliche, though, you'll generally find that almost every predominantly human settlement will have enclaves of non-humans, and NPCs prominent enough to warrant description are often of non- or half-human stock, much more frequently than even the dubious demographics of the setting would suggest. It's often suggested, as an explanation for why demihumans are so limited by the rules in their choice of class and the levels they can attain, that humans are simply more versatile and more ambitious, but the very opposite is generally borne out in perusing the named NPCs in any given setting or module.

All of this is not to suggest that the cosmopolitan setting is somehow inherently bad or wrong, but that it is generally used reflexively and thoughtlessly rather than with mindfulness toward how it affects the feel and dynamics of the setting. The cosmopolitan setting, with humans and various non-human living side-by-side, downplays and diminishes the fantastic and inhuman aspects of non-humans, and contributes immensely to the "humans with funny ears and special powers" portrayal of the demihuman peoples. It suggests that not only are non-humans readily capable of adapting to human styles, cultures, and social conventions, but that very, very many are highly motivated to do so. In humanizing the non-human, it normalizes the fantastic. If that's what you're aiming for in your campaign, I have nothing to say against it, beyond that it isn't my personal preference.

If, on the other hand, dwarves, elves, and halflings are meant to be culturally, temperamentally, psychologically, spiritually, fundamentally different from humans, why would so many of them choose to live among humans in human settlements? Why does that dwarf smith choose to practice his craft in a human village, when he could have remained in the familiar trappings of his dwarven society, with a proper dwarven forge and tools and a ready supply of high-quality dwarven metal to work with? Why does he want to be among humans, with all their flippancy and frivolity, their disturbing degree of casual openness, their anxiety-inducing penchant for fractiousness and disdain for proper order, their weak ale and strange food, their weird houses built above ground with sticks and mud instead of good honest stone...? Why would an elf want to live away from the natural harmony and beauty of her home and kin, among folk whose lives are so short, with correspondingly shallow perspectives on existence and eternity, who live in ugly buildings of stone or dead wood with nasty, muddy streets running between them, who till the earth and tame beasts for food, who are mostly blind and deaf to all the sublime magics of the world? Even halflings, who are nearest to humans in their nature, have enough differences to make living among them the exception rather than the rule. The village of Bree in Middle-earth was remarkable for its intermingling of the two peoples. 

This is not to say that demihumans should never be found living among humans, but they need good reasons for it, beyond simply an author succumbing to the tired cliche of every smith being a dwarf. They're likely to be misfits and outcasts, maybe even exiles from their own people. In their new homes, they probably aren't going to be well-integrated and respected members of the community, but oddities, misunderstood and often distrusted. The dwarf who sets up a blacksmith shop is likely to struggle to do business, even if his goods are superior, and even if the community generally recognize that fact: they're just more comfortable interacting with the human smiths, who are perfectly capable of making the scythes and ploughs and nails they need, anyway. The town's resident elf, if it has one, is likely regarded as mysterious and unsettling, not the barkeep of the most popular watering hole. She's wandering around in a semi-fugue state muttering about ancient history as if it happened yesterday, not merrily cracking jokes she probably can't even understand and pulling pints for the local rabble in a rowdy tavern. 

By the same token, most humans won't feel comfortable or wholly welcome in demihuman communities. Culture shock is a thing in our real world, where humans are the only sapient species. Despite our overwhelming biological and psychological similarities, we have trouble adapting to other human societies. Even moving to another country which shares a common language with your mother land can be jarring -- hell, even different regions within the same country present challenges to one's psyche. So imagine trying to make yourself feel at home among folk whose minds are to some degree inherently unlike yours, who have traditions and customs and needs you're constitutionally incapable of really grokking. Imagine living underground in a dwarven town, never seeing the sun or the stars, never feeling wind or rain, being looked down upon for being lazy, having nobody with whom to unburden yourself of life's worries because such intimate things just aren't discussed in polite dwarven society. Imagine living in an elven settlement deep in an ancient forest, without shops and taverns and farms and churches, where cutting down a tree is a ghastly offense, where all your life's greatest aspirations and concerns are considered trivial by people who will outlive you many times over, and thought of as crass and crude. Imagine living in a halfling village, where everything is sized for folk no taller than toddlers, and you can't even visit the local tavern without going home with a cramp in your neck from stooping the whole time, where you're likely to be regarded with at least a little apprehensiveness because of your relative size and strength. 

It's these great differences, with all the potential for incompatibilities, frictions, misunderstandings, and even prejudices and antagonism inherent in them, that make the different kindreds interesting. They don't have to be enemies; they can be on amicable terms, they can trade and interact with each other, but for the most part, they're just too different to feel at ease in each others' societies on a long-term basis. 

Adventurers, of course, are a breed apart from their respective races. A dwarf, elf, or halfling might be curious of, or even fascinated by, humans and their societies, and eagerly endure the culture shock to indulge their need for exploration and adventure. Even if they still identify with their own kin, even if they're revered as heroes by them, they're still probably thought of as being a bit off-kilter or not-quite-right in the head, so being out-of-place among humans is a familiar, if perhaps a bit more intense, version of something they're already accustomed to, requiring only a little adjustment. A few could even become familiar and comfortable enough with humans to take up permanent residence among them, as they realize that feeling of never quite fully belonging is just a part of them, no matter where they hang their cloaks. But they are, and always will be, the exceptions, not the rule, and not even a substantial minority.

Bottom line: If you want your demihumans to be truly distinct from humans, on a level deeper than mere cultural differences, consider keeping them almost entirely separate, both from humans and from each other. Make their settlements and societies feel alien and uncanny to human sensibilities. Let their important NPCs be of their own kind: smiths in human villages should be overwhelmingly human, publicans in a dwarf settlement are almost certainly dwarves, and shopkeepers in a halfling community are probably halflings. Demihumans might not have all the professions that humans do, and vice-versa, but if dwarven herbalists and elven jewelers are things that exist at all in your setting, then why not make them prominent among their own kind instead of trading them out for specialists of other races? (If they don't have some profession, but need or want its products, that's a good basis for a trade relationship, but probably not permanent residency. Just because elves want dwarven steel weapons doesn't mean any self-respecting dwarf smith wants to live in a treehouse with dreamy-eyed singing lunatics for neighbors!)

At least, that's my take on the matter. If it's something you've never really considered before, you might give it a mental whirl and see how it feels for you.