I don't believe downsizing would do much to reduce unsprung weight and reduce fuel consumption. Make sure your cold tire pressures are high enough (At least 230kPa or 33psi), get rid of excess weight in the trunk. Learn more efficient driving techniques like more gradual acceleration. 16 US mpg isn't too unusual for heavy urban driving (stop-and-go only) simply because the vehicle weighs so much.

In suburban driving, I average about 19 to 20 US mpg, and on freeways I can yield anywhere from 26 to 29,2 US mpg. I don't really subject my X3 to the tortures of urban traffic, there aren't any big cities around here