The reason the pendulum oscillates is that there is tension in the rope holding it to the ceiling. The ball on the pendulum has potential energy and due to the tension in the rope will follow a pendulum path, however when the elevator falls, the entire system is freefall. There is no longer tension in the rope, because the entire system is falling at the same speed.
This is equivalent to holding a pendulum up, swinging it, and just letting go. Once there is no more tension in the rope, there is no centripetal force to keep it in motion.