After Halo 3, development studio Bungie created an internal team to work on Peter Jackson's planned Halo game, Halo Chronicles. Chronicles was eventually canceled and the team began working on a standalone expansion project—Halo 3: ODST—while another team, led by creative director Marcus Lehto and design lead Christian Allen, worked on Reach. The team considered many different concepts and approaches to the game; among the rejected ideas was a sequel to Halo 3. The team eventually settled on a prequel to the first Halo game in brainstorming sessions. It would take place on the planet Reach, during a pivotal time in the war. "Reach, as a fictional planet, was just a great candidate [to] play around with. It's such a rich world, with such a great fiction surrounding it," said Lehto. "We were like: 'Okay, that's it. We've just got a lot of things we can do there so we can build an immense story with it.'" No longer burdened with continuing the story threads of the Halo trilogy, Bungie used Reach to introduce new characters and settings. As Reach ends with the destruction of the titular planet, Bungie wanted to be sure players still felt a sense of accomplishment and success. "It is a challenge overall to ensure the player feels they're doing the right thing all the way to the end," said Lehto.

Lehto recalled that making a character-driven story was a great challenge—players would come to know more about them as they progressed through the campaign, but the Spartan characters also had to behave intelligently. "The Halo games consistently featured protagonists that were silent during gameplay sequences. Community manager Brian Jarrard pushed for allowing players to choose a female Noble Six and have the cinematics and dialogue change accordingly. The post-credit game sequence was the subject of intense discussion; some at Bungie wanted to remove it. Executive producer Joe Tung noted, "the 'survive' component ... felt great to us. We definitely talked about different versions of how that was happening and different versions of ending [the game] cinematically, but I think the way that it ultimately ended up is just a really well-paced, significant and emotionally impactful ending."

The developers originally intended to port existing Halo 3 assets to Reach and update them. For Halo 3, Bungie had been forced to shrink parts of the game to fit the game engine's constraints, but wanted to make Reach look better than its predecessors. "The more we started looking into this, the more we found that realistically we could rebuild each asset from scratch with a huge increase in quality without significantly investing more time," said Bungie 3D artist Scott Shepherd. Texture resolution and polygon counts for models increased; the Reach assault rifle is constructed of more polygons than an entire Marine character from Halo 3. The prequel concept also gave the art team an opportunity to redesign key enemies, weapons, and elements of the series. Artists found inspiration in the original concept art for Halo: Combat Evolved; the shape for the redesigned Covenant Grunts came from a sketch that concept artist Shi Kai Wang created ten years earlier.

The developers redesigned the game engine, the software that handles rendering and much of gameplay. Bungie hired an expert in motion capture to develop more realistic character animations. Building a motion capture studio in-house saved Bungie time as motion capture data could be applied to the game models the same day it was shot. The developers sought to increase replay value by focusing on improving artificial intelligence. Rather than scripting enemy encounters, they focused on a more open worldor sandbox approach to battles.