Basement framing low pipe ceiling

Question

Cleaned out the basement to start framing walls. 1950s house with a lot of water pipes below the floor joists. The main wall has a pipe about 5 inches away from the wall but runs along the majority of the wall. Would you recommend:

1. Building the wall up to the floor joist behind the pipe, then build a soffit around the pipe.
2. build the wall in front of the pipe, potentially losing about half a foot of space across the room.
3. Build the wall up to a lower point then the floor joist and build a soffit from the floor joist to the top of the wall

See the picture for the area I'm referring to.

Answer 1

Personally, I would enclose it in a soffit from the pipe to the wall (option 3). That way you may not have to rerun your power cables as long as the window doesn't interfere. Also the drywalling will be simpler.
Edit You will need to frame out the soffit with 2x4s same as you would do if you framed a wall but it'll be a lot less work and material. Hard to tell from the picture but you may need to move those cables to frame your wall. You'll have to butt the header up against the ceiling joists and they may interfere.
Again, you need to figure out how to frame around that window, especially with the soffit. You need to maintain enough clearance. If the soffit interferes with the window you may have to just wrap the pipes with the soffit.

Answer 2

Here is what I did in my basement. I glued 1" styrofoam T&G 4X8 sheets to the basement walls and taped all the joints with a foil tape. Then I added a bottom 2X4 plate using anchors drilled into the basement floor. I used Simpson anchors M# Sl37300H 3/8 X 3" or Red Head anchors M# 11013 same size. Note if you penetrate the concrete floor, pump in some silicone caulk to act as a waterproofer. Screw a 2X4 top plate to the joists. Run the vertical 2X4 studs 16"C floor to ceiling and notch the top of the stud to clear wiring etc if necessary. You can insulate the walls with 3.5" batt insulation and finish the walls as you like. (paneling, drywall, etc.) For the ceiling I would use a 2X2 drop ceiling with 3" minimum or 4" max tile to ceiling clearance. This would still give you a floor to ceiling clearance of about 79 to 80". Just don't invite any very tall friends to the basement. It works great for me.