Is there a reasonable (known) limit that even digital sensors would fail at? 10ft? 50ft? 200ft?
With an RS-485 driver 4000' at slow speeds (~100kbps).
You shouldn't need a full Arduino at every location, maybe one or two per room each with X number of sensors plugged in to each one. This is the approach I'm using with this
But it doesn't satisfy your "the minimum electronics needed on the remote end" requirement. It does however have the advantage that local control can be autonomous to the master, so if your master dies or is having new code tested you can still turn the lights on in each room. Also I plan to have single-chip nodes after we get the first Arduino node working. These single-chip nodes will be very small and (presumably) very cheap.
But all this is a way off yet.
Meanwhile there's nothing wrong with using a Tiny84/85 at each node either. They don't have serial ports but you can bit-bang that and there's an Arduino port to both devices I think.
Rob