Wallace Development bought the building this year.
It will be redeveloped into two sites and both have already been tenanted.
The ground floor area of the Art Deco-fronted section will house a 180sq m cafe.
It is understood the cafe operator owns cafes in other parts of Hawke's Bay, but not in Napier.
The second tenant will be the Premier Hairdressing College, which now operates out of a site on Marine Parade.
Mr Walker said the new section, fronting on to Dalton St, would have a 100 per cent earthquake rating and feature a series of window fronts to replace what he said had been a "bland" expanse of wall.
The Dalton St side would also have a new entranceway as part of the hairdressing college.
"The Art Deco front will remain but the back part will be all new," Mr Walker said.
Judd Dougan Team Architects had used existing lines of the old building as a flow-through to the new section.
Stripping out of the interior began several weeks ago, but demolition of the roof and rear section did not get under way until last week.
"We are looking to have it all completed and up and running by the end of October."
The whole project had "taken a bit of putting together" but he said if they were able to maintain a good return it would be "good for everyone".
Mr Walker would not divulge the development cost but described it as "significant" and less than $1 million.
The State Theatre was designed by local architects Finch and Westerholme and was opened in 1934. Its Art Deco styling was as distinctive inside as it was out, although during the 1960s the interior was remodelled and the stylish pattern work was replaced by dozens of giant coloured bubbles across the walls.
There were further changes in 1991 when the theatre was owned by Hoyts and Graeme Edwards, with the interior again being revamped. It closed a few years later and was subsequently used as a youth venue.