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Not sure why they would give an entire portion of a city to all the baddies though.
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They might be taking a cue from Batman Begins, which has it located in a densely populated slum, called "The Narrows" in the movie. (The slum area, not the Asylum).
Or, if your meaning was to ask 'why villains now control a portion of the city' (As opposed to just increasing the space of the Asylum), well that was somewhat covered in one of the comic book story-lines called "Cataclysm" where an earthquake struck the city, which afterwards segued into
No Man's Land, depicting a chaotic, abandoned of most of the population, decayed city.
I still need to play through the first game

, but nice to know there's a sequel coming.
Jam it back in, in the dark.