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Is it recommended to enable output: "standalone" when deploying on Vercel, or are Vercel's internal optimizations sufficient?

Not necessary. I don't think there's any +/- recommendation here. Vercel recognizes frameworks, not just Next.js but Nuxt, SvelteKit, even Hono, etc, and knows what strategy fits best to deploy on their platform.

Are there any limitations or gotchas when using this for dynamic sites with runtime data fetching or dynamic routes?
I’m also using route handlers (API routes); could this cause any issues with output: "standalone"?

No to both, but I guess, maybe you wanna make sure that things get traced correctly, https://nextjs.org/docs/app/api-reference/config/next…

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@abhishekmardiya
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