Well, telling by the size of that space, Wizard City could fit another location or two there on the lakeside, or maybe under it. It would be interesting, Wizard City is in need of some facelifting. Between Cyclops Lane and Triton Avenue, maybe Dark Cave could more realistically reach into that region. Speaking of Dark Cave, it would be nice to see Dark Cave actually get its own story line maybe, and some bosses.
Maybe the new area would be for later levels for wizards to complete.
I think it'd be cool. Also, I think there should be areas of the Wizard City drain system to be accessed, there are pipes and stuff, they have to lead somewhere!
Sunken City, should also lead straight into Unicorn Way. Looking on the map it seems those two may be close together, so maybe a large doorway near Grubb's castle could be made that's only accessible after Grubb is defeated. After the Sunken City questline, you could get high level quests in which you go back into a recently revitalized Sunken City.
Re: Ever seen the large lake on the Wizard City map?
At first I thought you were talking about the pond in the commons, but then I saw your lake. Don't you travel to the lake in Crab Alley/ The Deep Warrens or whatever it is called? So we do already have access to that location?