I think a mix of #1 and #2 is the most likely route, though perhaps not the same amount/franchises that you suggested - I personally see a bigger starting pool of newcomers. First, Sakurai has historically had many of the characters decided from early in development. So this lines up with your first theory - many of the characters are decided early on, and then a few are added later into development. I agree that many of these would be Switch characters, though it is worth remembering that
Sakurai does have access to Nintendo documents, so I believe he could’ve known about development of these games before they were announced, allowing for earlier inclusions. While these references would, of course, be limited at first, like the early ARMS picture that
Skyblade12
posted, they could start developing a catch-all ARMS character with the concept. Then, as development of these games continued, the characters could be polished and given their real designs. Placeholders could be used to allow the concept to be worked on!
Second, the Japanese Smash Ballot had a bit of text that was absent from other regions’ ballots.
Here’s the Japanese Ballot, translated by SourceGaming: the noteworthy part is below the voting fields, where it says, “The information received from this vote (Henceforth known as Submission Data) will be use for consideration for this software’s fighting characters,etc and for reference for future software”. So that’s pretty clear confirmation that they’ll be using the Ballot as reference for Smash 5! It’s possible that the reason they only brought one Ballot character into Smash 4 - Bayonetta - is because they were saving the rest of them for Smash 5, where many of the newcomers are directly influenced by our votes, meaning highly voted characters have a good shot of making it. This makes sense, since the highly voted ones are the ones people want most, and would get the majority of people the most excited.
So I definitely see a mix of your theories being the most likely scenario! He won’t go off the Ballot exclusively, but it will be used for choosing a number of newcomers.