Yep. that would be the reason your file was transferred to the local office - because you don't have legal temporary status in Canada, your case has to have special processing. I guess maybe this is because CIC sees a higher likelihood of non-genuine relationships between sponsors and applicants who no longer have valid temporary status in Canada . . . in other words, someone who loses their temporary status might marry someone in order to stay in Canada, so CIC wants to look more closely at the relationship, and so they transfer the file.
Yes, you still have the chance of getting Approval in Principle and a work permit . . . but depending on which local office your file was sent to, you may have to wait longer than the normal 5-6 months it takes to get first stage approval through CPC-V. This type of thing happens all the time now, because people are misled by the Feb 2005 legislation that seems to say that applicants don't have to have legal temporary status to stay in Canada, as long as they file an inland PR ap. What it actually says is that applicants without legal temporary status can now apply for PR from within Canada (they didn't used to be able to), and even be approved for PR - if they have an eligible sponsor and a genuine relationship - but they are still responsible for maintaining legal temporary status or they cannot work or study, and they risk removal from Canada.
Now, CIC doesn't seem to be actively removing applicants without legal temporary status after they've filed inland PR aps - so in some ways, it does protect you. But they are making them wait much longer to get AIP . . . which makes you "legal" again because your work permit will be your new temporary status document.
Have your sponsor contact the Call Centre to find out the processing times for the local office your file was sent to. You shouldn't call because they will ask you all kinds of questions about where you are, what your status is, and then threaten to start removal proceedings because you have overstayed. You don't need that! Or you can tell us which local office your file went to and we might have experience and be able to tell you how long to expect.