I feel I need to push back against some assumptions implicit in your question when you argue that "fascism was so hell bent on territory".

Yes, Mussolini and elements of the Fascist government and army supported the annexation of Ethiopia as part of the imperial project. However, the annexation of Ethiopia as a colony should not be seen as a simple act of acquiring territory for the sake of having more territory.

The annexation of Ethiopia was motivated by numerous factors. Part of it was certainly the European imperialist norm of the late 19th century and early 20th century that saw the establishment of colonies around the world as evidence of the power and prestige of the metropole. Mussolini characterized efforts by Britain, France and the League of nations to stop Italian aggression against Italy Ethiopia as an attempt to deny Italy "a place in the sun" as a fellow prestigious imperial power.^1 Italy certainly played into the narrative of the "civilizing mission" of the colonial powers, when they announced one of the war aims was the abolition of slavery in Ethiopia.^2

Part of it was also motivated by a desire to avenge the humiliating defeat at Adwa in 1896.

However, to fully explain the Italian government's desire to control Ethiopia, we must put the lead up to the 1935-36 war in the political and economic context of the worldwide economic depression of the 1930s.

Mussolini and members of his government spoke of an Italian-ruled Ethiopia (as well as other Italian colonies) as an economic outlet for Italy. The prospect of establishing communities of Italian settlers in Libya, Somalia and Ethiopia was seen as a solution to the problem of having too many Italians who wanted land to farm, and not enough land in Italy.^3

So, from the perspective of "land hunger", annexing the Vatican is not worthwhile. The total area of the Vatican established by the Lateran Treaty was 44 hectares, or .44 km^2 . In comparison, Ethiopia is about 1.1 million km^2 . So, I must agree with /u/Van_Huffelaer that annexing the few rennaisance era buildings in the Vatican would not have brought much of an economic benefit to Italy, while the annexation of Ethiopia was seen as a potential source of economic growth in Italy.

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1)http://users.dickinson.edu/~rhyne/232/EthiopiaSpeech.html

2)http://xroads.virginia.edu/~ma04/wood/mot/html/ethiopia.htm

3)Fascist Modernities: Italy 1922-1945 pp 20.

Since the 1870s, the Popes had already locked themselves in the Vatican. Prior to 1870, what's still known as the Vatican City State (a universally recognized independent state!) was then the Papal States - controlling vast swathes of the Italian peninsula. For centuries, the Papal States had been one of the major regional powers and, thanks to its obvious religious authority, a state on the world stage.

The Wars of Unification of Italy toppled the Papal States. Rome was, in a very literal sense, annexed by the Kingdom of Italy. The Popes never recognized this and retreated into the Vatican. Italy's secular rulers wisely decided to let the Pope be. In a very religious and catholic country, during ideologically and politically volatile times, it would be really unwise to drag the Pope out of his self-imposed reclusion and force him to de jure recognize the new balance of power.

This doesn't explain why Mussolini wanted a treaty. Why not continue the policy of ignoring the proverbial elephant in the city? By signing the treaty, Italy recognized the Vatican City State as an independent state, and the Pope recognized Italy.

The Lateran Treaty recognized and in a way legitimized the Italian state and, more importantly, the fascist state. Considering the Catholic church's enduring religious authority, that's way more valuable than a few dozen hectares of Renaissance buildings.

That of Mussolini was in reality a mere bid to ingratiate himself to the more religious strata of the population as part of his never-ending quest for consensus, especially at a time in which popular Catholic organisations (such as the boy-scouts) had been just outlawed in favour of their more "Fascist" equivalents.

But of course - there was also the will to bring the "Roman Question" to an end, and for good...