If you have the funds, redo the entire area into two private baths and closets, one for each bedroom. You for sure have enough space.

I have to agree J&J batrooms are horrible and the vanities in the bedroom do nothing to make the bathroom better Actually that whole floor plan makes no sense where is the other bedroom?

While it appears you have enough space to split the whole thing down the middle and make two complete bathrooms (assuming you can move walls and plumbing), what happens to the closet space for that one bedroom? do they have sufficient closet space elsewhere? -- oh wait, reading your post this bedroom relies upon closet space within this square footage.

What space do you feel is wasted?

Pocket doors might help.

Are you willing to have the two bedrooms share one vanity/sink instead of each having their own?

I don't see a better solution than what you already have -- will follow this thread to see if someone else has a creative idea :-)

I think you could fit in two separate bathrooms, if that interests you, as well as closet space for the room on the right. However, the layout that I was going to suggest would not work well with the current window placement. Would you be able to move the existing window and, ideally, add another window along the top wall?

Could you post a complete floor plan that includes the two bedrooms, all doors, closets, windows, and the bathroom?

Compared to many J&J's, yours is a successful arrangement and meets the concept fully. I read nowhere in your OP about what you would like to accomplish, other than utilizing SF better. "Update" can mean a fresh coat of paint and new knobs. There are many constraints as far as changing things: structure, windows, plumbing, etc.

Personally, I would get rid of the window altogether. I detest a window in a bathroom. You can't leave it uncovered. A fan is much better. With no window, you never have to worry about the neighbors.

I've never worried about the neighbors ;) and I truly hate a bathroom with no natural light. A claustrophobic card may be coming into play here, but I much prefer a bathroom with an operational window. My former house had a 4' skylight that opened by means of a fresh air vent at one end. You couldn't leave that bathroom in the morning unprepared to face anything at all you might encounter - no flaws spared at the mirror in that light. I miss that skylight.

I hate one with a window.

ETA: You don't have my neighbors.

@Sherry - That is a very... passionate stance on bathrooms! This bathroom is upstairs and our backyard is a forest. No need to worry about privacy or neighbors. This bathroom has both a window and fan and I do prefer both, especially in a small room.

@Patricia I have seen many of your comments regarding JnJ bathrooms, and I must say I was hoping you wouldn't see my original post. I did not post the entire floorplan of this area. The other bedroom is on the left.

@marilyncb This is most helpful, thank you! You are correct. It's not horrible to have two bedrooms with private vanities, but they are quite sad and dark little areas! We were hoping to move walls and plumbing but no exterior/window changing. That said, option 2 is a beautiful use of our existing space! Thank you!

Morz8 was just as passionate for a window. I just do not like them at all. I put these light bulbs in both our baths and it is daylight anytime of the day with a flip of a switch. If you like Jack and Jill baths, you could just change the lightbulbs and it wouldn't be sad and dark anymore. I installed new fixtures over the sink that holds 2 of these bulbs each.

https://www.lowes.com/pd/GE-Refresh-100-Watt-EQ-A21-Daylight-Dimmable-LED-Light-Bulb-2-Pack/5002209367