I don't think that the Source Engine needs any significant upgrades/updates, in my book it's already good enough, its age shouldn't be the sole reason necessary to warrant updates in my opinion, although there's only one thing I don't like about this engine and it's how objects/entities/models react when they're touching each others underwater, there's always one of the two (or more) objects that will get "catapulted" out of the water, because the engine considers the concerned object as one that's trying to get out of water such as a player trying to get on top of a floating platform, that effect can easily be seen in Half-Life 2 (and the Episodes) as well as TF2 when for instance in 2FORT two or more players will fight underwater (being enemies, they need to touch each others and not clip into each others as players of the same team would) and very often, if not always, the one player that happens to be partially submerged will be propelled into the air out of the water and then the effect will repeat to the other player and vice versa until either of them ends up dead or move away, it's something that is inherent to the engine and cannot be fixed (from what I've read in discussion forums anyway).
But outside of similar minor (although annoying) issues the Source Engine is one of the most stable, efficient and scalable engine I've ever seen, I wouldn't want it to turn into a new CryEngine, we already have one such engine, additionally the current graphics that the Source Engine can do on a technical level is way beyond anything you can see in L4D, Half-Life 2, the H-L2 Episodes and even TF2, if you want a proof of that download the the FakeFactory Cinematic Mod for Half-Life 2 and look at how good character models and textures can be when the engine is being pushed to its limits. What Valve is giving us by default is just enough to meet standards and is highly influenced by the Valve's own hardware surveys that they've been doing over the years, they adapt their engine and its capabilities along with the settings we have in-game based on the results of their observations on their consumers' hardware capabilities. If tomorrow every Steam users would have at least a Quad Core CPU at 3.0Ghz with a DX10.1/11 capable GPU or SLi setups with 6GB or RAM and 64-Bit OS'es then perhaps they would consider making "considerable" upgrades, but it ain't the case.
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