I attended a lecture by one of the development officers at Avesta on this project and raised the same exact point about the views of the neighbor. Not that I really care too much because I am more in favor of density, but it was something I thought about. The guy said as long as the building is within zoning and unless the other property owner wanted to buy the land to protect their view, the new building was totally OK, and he's right. But I brought it up because I thought about the opposition it must have caused. Apparently, the neighbors in that building were amongst the toughest opponents of this project, but are now more cooperative and on board with the final plan, which has been adjusted to attract "artists" instead of just low income tenants. It was really quite interesting to hear about the funding for this project, which would not have been viable as affordable housing in this urban infill location were it not for a state bond.
The site itself was probably developed before, but I don't know for sure. Then I imagine it sat around for a while, with no interest when the suburbs were the center of attention. Then there was interest in this site for a larger market rate proposals (the Oak Street Lofts) in 2007, which ultimately never was built because of the recession. Avesta then got the site and proposed a very attractive looking building that is now under construction.
This site is also, I believe, one of the properties depicted in the downtown vision renderings by C. Michael Lewis with new construction.