"To be honest we found the best bang for the buck was to have teams of 3-4 people who are working on a subsystem sit together in a big room"

This. In my previous job the 5 person team of I was part of quietly took over an unused meeting room and had the most productive 3-4 week span that any of us had encountered in years. Part of it may have been that no one could find us, which caused people to complain and our manager finally forced us back to where we supposed to be. Productivity dropped instantly, but at least people could bother us with trivial, non-breaking IE7 bugs.