Intuitively, it seems like if Starship is able to travel all the way to Mars, it could also work as an Earth orbiting space station. The major challenges that jump out at me are the different radiation and temperature flux environments. That being said, Starship has so much upmass capability that anything needed to make this work should be easy to ship up.
As for the floated idea of a wet workshop, that would be super amazing. But seems a bit overkill and perhaps even wasteful?
I’m a little surprised. Who knows what they consider the main dev tree vs a distraction for Starship, and I don’t really see what this agreement adds that they wouldn’t have already gotten from NASA through the human landing system contract. It sounds like SpaceX really phoned it in when they bid a Starship station as an ISS replacement, so, to me, that signalled that Starship stations weren’t on their main path. I’m glad this is happening, but, yeah, I’m kinda surprised.