Quite simple answer to your concern. There is currently not enough existing density in Preston/Galt to justify LRT. The only way that the city as a whole can justify LRT is to look at future growth. If you want bus service by all means keep the existing density.
But if you want LRT to Galt you need added density along the route. It's a long way from Kitchener to Galt to have an LRT with zero demand along the entire route until you get to the end.
And yes, Preston is nice. But a 4 block strip of worn down stores with large parking lots behind and no residential/commercial density. Not a hot spot for LRT.
There are some very practical reasons for the alignment, outside of the potential for development on Hespeler Rd.
First, Hespeler Road alignment will stop near Smart Centres, which provides a connection to the 25 GO Bus. It's a bit of a walk from where the LRT would enter Hespeler Rd, but its' valuable. A route through Preston does not permit this.
Second, Cambridge Centre is a major hub for GRT busses. Skipping this is makes LRT far less accessible to many Cambridge routes.
Third, there is residential development on Hespeler Rd. immediately South of Dunbar St., including a new development in early stages.
Fourth, King St. in Preston is about the same width as King St. in downtown Kitchener, which required a one-way alignment to preserve traffic. The same would have to happen in Preston, but there is no reasonable route for the second half of the one-way alignment.
Pathetic as they are, Cambridge Centre and SmartCentres Cambridge have important transit connections that a spine like the propose LRT cannot reasonably bypass.