It refers to the average level of the characters in the party. Example: four 3rd level characters are a "3rd level party". That having been said, 5e generally makes all claims about encounter difficulty assuming that the party consists of 3-5 PCs. If there are more or less than this, the difficulty of the challenges they can overcome needs to be adjusted accordingly. See the DMG, p. 83 (and surrounding pages) for more information.
I'm unclear what you mean by "Princes of the Apocalypse would be scaled up incredibly high", so I cannot address that.
“A wizard did it”
You’ve probably heard the phrase before to explain with a hand-wave why something weird exists, like bulettes or owlbeards: “a wizard did it.” There are things in D&D that were made by human Dungeon Masters for convenience of creating fun adventures, not via rules for players.
Like owlbears were (allegedly) created by a mad wizard, so is a lot of Undermountain.
Halaster’s apprentices are mad and powerful inventors
Halaster’s apprentices are older than Waterdeep. The city was built on the ruins of their original wizards’ tower. Today, those who still live, are ridiculously powerful archmages. Halaster himself, if he still lives (the jury is still out), is nearly a god-like force of nature in his own home.
The entire existence of Undermountain was originally to give Halaster and his apprentices a place to learn secrets of magic and develop new spells and things in private. The place is packed with bizarre, unique creations that have not been shared with wizards outside its halls.
His apprentices guard the secrets of their discoveries and creations jealously (first and foremost from each other — only secondarily do they care about the world above), and nobody knows how they do what they do.
In a less lore-focused way, Halaster and his apprentices were created to be plot devices, which could be used to explain anything non-standard that exists in Undermountain.
Every spell was invented by some wizard once
Earlier editions of D&D had spell research rules, and those are part of the lore of even 5th edition. For example, Tenser’s Disc was invented by Tenser (a PC played by Gary Gygax’s son Ernest in Gary's campaign). The spell wasn’t available until Tenser researched it and shared it with other wizards, so that knowledge of the spell spread throughout Greyhawk and, before long, across the Multiverse.
Halaster and his apprentices have invented many spells, rituals, and partly-magical inventions. You will find many unique magics under Waterdeep, but won’t necessarily learn the secrets behind them easily, if ever. Those secrets are buried deep, and they don’t like to share.
There is probably a ritual to create more of these living unseen servants, but it’s likely hidden away in the carefully guarded spellbook in the carefully guarded secret lair of a mad and dangerous archmage somewhere deep in the lower levels of Undermountain.
To read more
The original lore on Halaster and his apprentices is first established in their first published appearance, the AD&D 2nd edition megadungeon boxed set The Ruins of Undermountain. The price of the PDF is well worth it just for the lore, but it’s an excellent playground for PCs of all levels as well. (Converting it to 5e is likely a pain though, and I haven’t tried yet so can’t recommend either way.)
Best Answer
You can start DotMM at any level whatsoever and it's very easy.
You just skip the shallower levels of the dungeon and take your players directly to the deeper ones. Each dungeon level is like a standalone adventure, rich with NPCs and lore that can serve as interesting plot hooks, and any one of them could be dropped into a campaign on its own. The book also tells you the appropriate party level for each dungeon level.
I started a party at level 22 of the dungeon (17th level party) and everyone had a great time.