The dead are buried into the rock face, which is also the basis for the entire city. So, since the city's "floor" has been tunneled by numerous burial niches, it has become quite unstable.
Behind the factory grounds, it had gotten to a point where the structures could no longer sustain themselves. The entire area had become unstable. Houses started collapsing, streets caved in, leaving holes in the ground. For this reason the district was evacuated long ago. The district's emptiness, combined with the fact that its ground is a maze of sepulchres and burial coves, has led to the belief that the place is haunted.
If anyone should venture there, he would see old, ruined houses, entire sections of city fallen away and a near constant fog. But no one ever does, except perhaps some traders shipping their illegal merchandise into the city.