Situated on the South Eastern (or is it Western) part of Otaru (it's actually nearer to Minami-Otaru JR station than Otaru JR station). Anyway, you can't miss it as most of the tourists make their way there.
The point is to fully enjoy that slow, romantic stroll through the quarters. This is where you'll get most of your glass and orgel souvenirs. The handiwork is really intricate and delicate - so it's worthwhile to consider paying a bit more for the fine work.
There are old shophouses crammed in between modern buildings, but the local prefecture has done an excellent job of putting up signs pointing out and explaining the history and background of some of these buildings.
To top it off, there are many shops selling beautifully made handicrafts like windchimes, accessories. The list goes on and on.