If they insulated the space, it sounds like they're willing to try to mitigate the sound.. mass generally works better than insulation for sound - as well as sealing the walls tightly. I'd ask them to seal any outlets on the affected wall, put a gasket on the door & put an extra layer of drywall on one side (a more substantial wall won't transfer as much sound). There's also a product available called "green glue" that can be put between an extra layer of drywall to enhance the "mass" effect.
http://www.greengluecompany.com/
Even if you move, the next tenants will have the same issue, hopefully they will figure that out.
Going back to the old style of water heater probably isn't possible due to changes in efficiency standards. Over a certain capacity (I believe it's 80 gallons) the only legal heaters are power vent or heat pump & both make noise.