Emergency services were called to the Bazil's hostel and surf school, on Russell St, after reports of a blaze about 2.30am.
The building was occupied at the time. However, everyone inside appears to have made it out safely without injury, authorities said.
Video footage shows bright orange flames engulfing the building, which can just be seen in the darkness.
Hostel resident Ian Rennie said he was sleeping in a room at the back of the property when someone knocked on his door.
'Flood one day, fire the next'
They had spent the past couple of days cleaning up after several rooms were flooded.
"We had the floods two days ago and tidying up yesterday - lifting carpets and things.
"But now we've got this. We were going to get woken up about 7 o'clock to move stuff out of rooms to get re-carpeted.
"Man, I'm 60 and I've never been through anything like this - flood one day, fire the next morning. Wouldn't wish it on my best friend," he said, becoming emotional.
By 5am, seven fire crews from Westport, Waimangaroa, Reefton, Granity and Greymouth were still working to extinguish the blaze.
A support vehicle is also on site early this morning.
A fire investigator is due to arrive at the site early today, but early indications show the blaze is not suspicious.
