Work is under way on the three top floors of the four-storey former Conservation House, on the corner of lower Stuart and Cumberland Sts.
The Department of Conservation relocated from the three floors it had leased last year.
The development is being done by Meteor Properties Ltd, whose sole director is Chris James, of Queenstown.
Mr James, who has extensive property holdings in Otago, declined to comment on the development.
The building, on 0.05ha, has a rateable value of $2.7million.
Early last year, Mr James' non-notifiable resource consent application was granted by the Dunedin City Council, with any adverse effects designated as "no more than minor".
The building, built in 1910, is category 2 listed and is on the council's heritage schedule. It was originally the John Chambers & Son building.
Its protected facades and colour will remain untouched, and exterior windows will be double glazed.
Heritage New Zealand gave its written approval for the development.
The resource consent noted the most significant alteration to the streetscape would be a lift shaft extension to the top storey, but it would be matched in colour and materials and would appear as a "seamless extension".
There are 10 basement car parks under the building, of which nine would be available for the hotel.
The ground floor tenancy of Cycle World was expected to continue.
