Well "small teams with a high level of trust working on projects together" is pretty much the definition of how good agile teams like to operate — so I work that way a lot
You might want to dig into the CSCW research a bit since that kind of working environment, sometimes called radical co-location, is something that gets focussed on quite a bit (since there's a fair bit of evidence that it's a hugely effective way for folk to work together).
"It doesn't take much distance before a team feels the negative effects of distribution - the effectiveness of collaboration degrades rapidly with physical distance. People located closer in a building are more likely to collaborate (Kraut, Egido & Galegher 1990). Even at short distances, 3 feet vs. 20 feet, there is an effect (Sensenig & Reed 1972). A distance of 100 feet may be no better than several miles (Allen 1977). A field study of radically collocated software development teams,[...], showed significantly higher productivity and satisfaction than industry benchmarks and past projects within the firm (Teasley et al., 2002). Another field study compared interruptions in paired, radically-collocated and traditional, cube-dwelling software development teams, and found that in the former interruptions were greater in number but shorter in duration and more on-task (Chong and Siino 2006). Close proximity improves productivity in all cases."
— conway [dot] isri [dot] cmu [dot] edu/~jdh/VRC-2008
"One key finding is that distributed work items appear to take about two and one-half times as long to complete as similar items where all the work is colocated"
— www [dot] computer [dot] org/portal/web/csdl/doi?doc=doi/10.1109/TSE.2003.1205177
"Our study of six teams that experienced radical collocation showed that in this setting they produced remarkable productivity improvements. Although the teammates were not looking forward to working in close quarters, over time they realized the benefits of having people at hand, both for coordination, problem solving and learning.Teams in these warrooms showed a doubling of productivity"
— possibility [dot] com/Misc/p339-teasley.pdf
"Despite the positive impact of emerging communication technologies on scientific research, our results provide striking evidence for the role of physical proximity as a predictor of the impact of collaborations."
— www [dot] plosone [dot] org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0014279
There was also a great thread on the anthrodesign mailing list recently on ethnography & office design with a ton of useful/interesting references. Dig in at groups [dot] yahoo [dot] com/neo/groups/anthrodesign/conversations/topics/14562
(Apologies for broken URLs. As a new user I can't post 'em!)