I can't merge layers? Why is that?
That's because you have highlighted objects, and not layers.
In Illustrator they are different things.
Your layers may contain conflicting appearances, i.e different strokes, fills, brushes etc. or something else that prevents them from being combined. You need to clean them up.
In addition to what Kurt said, at the bottom left of the Layers palette it actually says 1 Layer, so no two (or more) to merge.
You can select whichever objects you really wish to have together and Ctrl/Cmd+G to Group them, thereby forming one or more Groups, the latter can be preferable for ordering/managing things, in this case the buildings/structures could be in one Group and the contour lines could be in one or more Groups; to form only one group from everything corresponds to just collapsing the Layer, either way stopping them from taking up screen space.