I can't unfavorite this exercise, why not?

At the current time, you can't update your favorites while in the favorites tab of the lower tray, you have to go to the original exercise in the tracks to perform the function.

As show below on the left two screens, if you enter the exercise through favorites, the heart icon does not appear on the screen of the exercise.

If you go back to the track where the exercise originated, then proceed into exercise, the screen now has the heart that can be tapped to include or exclude the exercise from the favorites. This is shown on the two images to the right below.

Is there a limit on the # of favorites?

No. The favorites tab on the lower tray will continue to add the exercises and introduce a scroll bar to the right to provide access to all. The user must scroll up and down to see them all.