Authorities were also forced to issue a warning over toxic smoke, telling residents to remain indoors and close their windows.
Traffic was also soon diverted away, as police shut both lanes of Walkerville Terrace and Northcote Terrace to motorists and buses while firefighters worked to control the blaze.
Just before 2.20pm, firefighters managed to contain the fire and the smoke warning was revoked.
The Metropolitan Fire Service advises that it is now safe for residents to return to their homes or businesses.
Firefighters will remain on scene for the rest of the day and overnight.
The public are urged to avoid the area for the rest of the day.
The Buckingham Arms Hotel has been closed since 2022 for redevelopment.
Police are appealing to anyone who saw any suspicious activity in or around the building or has any information on the fire to contact Crime Stoppers on 1800 333 000.