I agree with bikkebakke on pretty much all points. I wouldn't mind a more claustrophobic experience while spelunking.
Nor having cities (read: NPC faction settlements) being the size of cities as we know them in scope. Of course these would usually - probably - be quite a bit apart, as i have problems seeing any faction being comfortable building their capital too close to any other factions.
As for player builts settlements, i hope there aren't that many limitations (only on what type of surface you can build, only more or less level ground.)
If 3 Groups decide to claim roughly the same area back-to-back, well then, they'll have to negotiate if they fancy working together for a better cause, or blow each other away and see who's left.
As for possible upgrades, i'd hope they'd make some sort of tiered system, where a Group can choose to go in a specific direction. Would make sense (and immersion) that a settlement highly focused on trade would eventually get a mining operation going (lowering resource requirements for construction of items for Group members?). Or a settlement purely based on military dogmatism being able to hire better quality guards/have access to better equipment from NPC traders.
Limitations would come into play as the Group would require X amount of members to build Building A, reflecting how much influence they'd hold in their claimed territory.
Again, given two Groups choose to work together, these bonii could mesh with each other.
- Group A is a military focused settlement, providing protection. Group B is a mercantile focused settlement, providing equipment and caps. Shared Bonii suddenly allow Group A to be attractive to industry specced characters - bit lower industry bonii, perhaps, but higher probability of getting your goods sold at a better market, as a result of being able to hire better guards for your caravan. As an example.