This might not be too hard to implement using a small level. You could clear monsters out of the original level, then depending on who you invited (or offered refuge to) and how you conducted yourself, the gate leading to that level could change to point to a different version. I'd say 4-6 versions of the level should be enough to show a progression of buildings and fortifications, and then double that to account for good and evil characters. Alternately (since I'm not the one doing the work) there could be a set of levels for each character type: warriors could develop a castle, thieves a hideout, mages an academy, etc, or you could instruct your first recruits on what you want built.
If you don't want to have to force the main character to keep running back to defend the settlement from attack, then it should be in an easily defended location. The gate to the level could be a narrow mountain pass and the level itself could be a small canyon with high, shear rock walls, containing a small forest, a waterfall at the far side of the canyon from the entrance, and a couple caves. The canyon could be held by a small force and wind could discourage flying creatures from attacking.
Initially the canyon could be crawling with monsters and used by bandits, who have made a deal with some of the intelligent monsters there for protection, in exchange for a cut of the loot and help luring victims to them. As the area is developed part of the forest could be cleared for building materials and to start a couple farms. The caves dug (or just used) by monsters could be developed into mines.
I don't know if I'd want to see the game's release delayed to implement something like this, but if it can be done without too much effort it would be nice to have.
In one of the Ultima games on the original Nintendo you could meet a couple people looking for a merchant. If you didn't have one in your party you were willing to give up, you could head back to the inn, drop off one person and create a new merchant character to use. Once a merchant was left there, the location would gradually be built into a bustling town. Even though there were only about 4 stages of construction, it was still interesting to see it grow and new people show up.
