Much of ODST's development team started work on director Peter Jackson's Halo Chronicles video game during the production of Halo 3. However, the failure of a Halo film adaptation and the subsequent cancellation of Chronicles meant a sizeable team no longer had a project. Around the same time, production for Halo: Reach began, and Bungie realized that there was a window of time for the studio to create a new product, what producer Curtis Creamer described as a two-to-three-hour "mini-campaign". After looking at the proposal and the budget, studio head Harold Ryan gave the go-ahead.

With a game engine already assembled, the team began honing the concept. Bungie was interested in bringing changes to the classical Halo format which had remained essentially unchanged over three games. The developers spent weeks considering which characters they wanted to focus on. Having players control previous protagonists such as the Master Chief or Arbiter would have brought with it story baggage and expectations. At one point, they considered making the game a Covenant-themed story about an elite strike force. Instead, the developers looked at human characters; while they considered Avery Johnson, they settled on the ODSTs. "The ODSTs have always been fan favorites," Bungie community director Brian Jarrard explained. "We never really got inside [the ODSTs]," story director Joseph Staten said, and he saw that game as an opportunity to flesh out the black-armored soldiers.

Making the player an ODST required gameplay changes to preserve the classic Halo gameplay formula while branching it in new directions. The addition of silenced weapons and a revamped pistol were attempts to split the functionality of Halo 2 and Halo 3's "battle rifle" weapon and give the ODSTs unique armaments. The sound designers increased the loudness of the game's submachine gun to make it feel more powerful. The health mechanism was added to provide a level of tension; "it reminds you that you're vulnerable," Staten said.

With the main characters in place, the development team had to decide on a setting. "The events that unfolded on Earth is something fans still clamor for after being 'short changed' in Halo 2," Jarrard said. "Fans wanted to know what happened back on Earth, how humanity was defending it." New Mombasa's urban environments fit the intended feel of the game, as Bungie felt that the change of protagonists required a change in location: "We know the kinds of problems Master Chief solves," Staten explained. "He goes to ancient, alien ring artifacts, fights galaxy-consuming parasitic alien monsters and destroys alien empires [...] The ODST, they maybe take small parts in that larger struggle. But the kind of fights they usually get into are usually the kind of fights they can tackle in a day."

Returning to a previous setting offered the artists new challenges and opportunities to expand the scope of the city. Having the player walk through the streets at night inspired a film noir ambiance. Color shifts and a high degree of contrast pushed the game's look beyond what previous Halo games had offered, but the team had to make sure that even dark portions of the city were playable. The entire core development team looked at commissioned concept paintings to decide how lighting schemes would affect the gameplay. The genre also influenced the character names and archetypes. The player character, for example, fits the concept of a lone, hardboiled detective. To increase the depth of the surroundings, Bungie added touches such as advertisements, trash collectors, and civilian versions of previously seen military hardware.

Bungie began development of ODST in March 2008. ODST was the first Bungie title completed in less than three years, as production lasted 14 months. Since the team—numbering around 70, plus a five-person core design group—had such a small window for development, they had to prioritize features; for example, rather than completely redesigning the enemies, only a small new subset of artificial intelligence behaviors were added. Because the game featured an open world different from most Halo missions, certain gameplay tweaks, such as the revamped weapons and an overhead map, were necessary. Whereas in a traditional Halogame, the designers would know from what locations players would approach groups of enemies, ODST required a different strategy. "We had to make sure we had groups of Covenant patrolling the city who could react from wherever you attack from and look intelligent doing it," Creamer said. Though the game engine remained unchanged, graphical enhancements such as fullscreen shader system and parallax mapping added greater detail and realism.

The Firefight game mode was a late addition to the game. Staffer Tim Williams built a prototype shortly after Halo 3 shipped, placing the player in a portion of a Halo 3 campaign map and fighting enemies. When development commenced on ODST, William's concept was adopted for the game and refined. Designer Lars Bakken described one advantage of the game mode as providing a more friendly multiplayer environment than hardcore players online. The designers reused the campaign scoring and medal system from Halo 3 to add a competitive edge.

Sadie's Story was created by Fourth Wall Studios in partnership with Staten and artist Ashley Wood. Fourth Wall Studios was formed by former members of 42 Entertainment, who produced the highly successful I Love Bees alternate reality game to promote Halo 2. Recalled Staten, "we realized that in Halo we do a pretty good job of describing the clash of these military industrial complexes, but it really is the soldiers' story," and Halo 3: ODST offered a chance to take a look at the unexplored civilian story.

By December 2008, the game was "representational", meaning that players could experience the game from start to finish, albeit in an unfinished state. The entire Bungie staff was pulled from other duties to play through the game and offer feedback. Among the unfinished elements was the lack of finished dialogue delivered by voice actors, in which Staten filled in placeholder audio. The entire game was completed just before its presentation at the Electronic Entertainment Expo 2009.