It will be OK. Baby is probably almost ready for a big bed, right? Invest in a good bunk bed with under bed storage. IKEA. He might need a guard rail at first, or not depending on how he sleeps.

Big family/small space trick: you can stack two long, low dressers on top of each other to maximize vertical space. The left wall looks great for this. Make sure you screw at least the top one into a wall stud at a couple of places. You can add baskets on top for even more storage. It looks like toys get stored here too. Invest in cubbies with cloth bins for toys. A 2'x4' one could go under the window to double as a reading bench.

Finally (and this is the hardest part, I know from experience) in a small space you need to be meticulous about tidying and ruthless about not accumulating stuff. So every night at pj time do a five minute tidy with the kids. I find two year olds to be the best helpers, truthfully. When a new toy comes in, an old one goes out.

Bunk Bed Walmart: $174, with cube organizer $99, some cubes can have fabric storage cubes ($14/set)

What saved me was 1 or 2 plastic storage drawer towers with 4 drawers ($25 at Walmart). They have small drawers for the small pieces and larger drawers for bigger items. Organize them by theme and the kids will be able to find and put away their toys easily. If you get the one with wheels then they can roll it out to other rooms to play and everything is all together. Or roll it into the closet at night.

Seriously my kids didn't lose one piece of any set and I am not a neat freak. When my kids were older we put craft supplies in them, and now school supplies.

They may not be pretty but super handy and not a permanent piece of furniture.

Can you post additional pics and/or dimensions of the room?