How extensible can I make my installation in terms of sub domains and restricting membership to them?

You could do it with a multisite setup where you had a separate site for each group and had them all authenticate against a single site. If you have a bunch of expertise or money, you can do that, and I’ll be happy to help. But you likely just want to create a group and category for each of those localities. I think this is what you’re looking for Configuring group access, membership, and visibility