Three blocks of the central city were cordoned off from 8am while police negotiated with the man, who gave himself up without incident at 2.15pm.
The officer in charge, Inspector Alastair Dickie, said the man had called the emergency 111 number after breaking in to the Princes St building, which is being redeveloped as a Hilton Hotel.
He told police he was armed and was going to blow himself up.
About 50 emergency services staff, including 15 members of the armed offenders squad, cordoned off an area from Rattray St to Jetty St while the man remained inside the building.
He continued to threaten to blow himself up with an MK6 marine flare he had tied around his neck, Insp Dickie said.
Eventually, one of four police negotiators talked him off a ninth-floor balcony on the Princes St side of the building, from where he was threatening to jump.
Earlier in the day, he had handed over a hammer and a knife in exchange for a packet of cigarettes.
The man's mood had fluctuated during the day from happy and laughing to agitated and angry near the end, Insp Dickie said.
Police understood he had a history of mental health problems.
Staff from emergency psychiatric services assessed him at the central police station last night.
It was not known why he had broken into the former post office building, and he made no demands other than to have his family moved from their present location to another, with which police complied.
He was charged last night with unlawfully being in a building, wasting police resources, possesing an explosive, possessing an offensive weapon and breaching bail.
Several businesses inside the cordon reported a loss in trade during the emergency.
John Wickliffe Newsagency owner-operator George Sleeman said his shop on the corner of Princes and Water Sts was cordoned off from 8.30am.
"I want my money back," he said.
Healthcare NZ area manager Virginia McCall said 300 of its support workers were due to drop off their timesheets.
"It was a bit of chaos here.
The staff could not park in the usual place and all our support workers could not drop their timesheets off."Insp Dickie said the decision was made to wait out the situation, and not send in police officers to arrest the man, as the presence of the flare put their safety at risk.
"Had we tried to storm the place, the outcome could have been very different," he said.
"We were prepared to stay for the long haul if we had to."
Petra Schmitt, who lives in an apartment directly across Princes St from the old chief post office, was angry police did not tell residents what was going on.
She and her children, aged 2 and 4, were "petrified", but staff at the police station said only that she would be safe inside.
"What does that mean I'm safe inside? You never know. It is not right that we get information only from the press or the Internet."
Insp Dickie said police initially had concerns the man was armed with a flare rifle and their focus was on approaching the man and identifying the risk he posed.
Once they discovered it was a hand-held flare, the risk level went down and any thought of evacuating the area was dropped.
Police staff tried to advise as many people as possible within the cordoned off-area not to leave, he said.
"We believed there was little or no risk to people outside the building."
He said it was a "very unusual" occurrence for Dunedin police to have a situation where an armed person holed up in a central city building.
The real estate agent for the owner of the former chief post office said alarms were recently installed and police were alerted after an alarm was activated.
