About the only way(s) I can think of that a residential area could get smaller in a natural way would be if a river, earthquake, volcano, or landslide somehow took it away.
Since total area cannot get smaller (except as mentioned above), this kind of thing very rarely happens. An area might be rezoned, meaning some parts would have their allowable usage changed from residential to perhaps commercial. A city might annex part of an unincorporated area, but that tends more toward expanding. An area could be redistricted, meaning services, such as schools, fire protection, garbage pickup, etc. might be handled by a different group than before. None of these things are natural, though.
Do you have a specific situation that calls for this opposite of develop?