I do not see iPhone 7 simulators in Xcode 7.3 Do I need to upgrade to Xcode 8 to develop for this platform, or is this only a simulator issue?
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No you can not use xcode 7.3 for iphone 7 development with ios 10.
Because for functionality changes and for iphone 7 simulator you have to upgrade your xcode to xcode 8.
Xcode 8 supports ios 10 and iphone 7 simulator. It have also some nice features for developers.
So update it and enjoy coding.

KAR
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If you take a look at a question, that this question is duplicate of, you may see that it IS possible. – pedrouan Sep 17 '16 at 17:25
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I noticed that Xcode 8 does not have the iPhone 4 and iPhone 4s simulators. Is it impossible to develop for both the iPhone 4 and iPhone 7 with the same Xcode version? – nomad Sep 17 '16 at 19:33
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On apple's website in ios 10, there are list of supported devices of ios 10. So from now iphone 4S is not supported to new OS. But you can check it when you run your app in simulator, find hardware menu in xcode on top. And go to devices. There are available devices listed and you can directly select it from there. @nomad – KAR Sep 18 '16 at 04:55