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I know that when a battery is charged, it produces some gas that is flammable (hydrogen, I think). Does that mean you wouldn't want a battery in a small airtight/watertight compartment?

If we are talking about traditional lead/acid batteries like in your car (well assuming you don't have a new electric car ;-) then yes, you need to allow the hydrogen gas to escape when charging the battery. Remember that this gas is explosive, so yoou definately don't want it in a confined space where there might be a spark!

Battery compartments require ventilation to allow the gas to escape.

ABYC E-10 wrote: 10.7.9 A vent system or other means shall be provided to permit the discharge from the boat of hydrogen gas
released by the battery.

10.7.10 Battery boxes, whose cover forms a pocket over the battery, shall be vented at the uppermost portion of
the cover.

NOTE TO 10.7.9 and 10.7.10: These requirements also apply to installations of all batteries whether they
employ removable vent caps, non-removable caps, are “sealed” or “maintenance free” batteries, or have
pressure regulated valve vent systems with immobilized electrolyte (gel batteries).