The second floor of a Sydney backpacker hostel was on fire this morning, evacuating the hotel and causing traffic chaos.

The building in Chippendale is well alight after the fire was reporter just before 8am this morning.

It's believed a balcony and two bedrooms were severely damaged.

Fire officers have searched every room and have found no bodies.

Superintendent Tom Cooper from the Fire Brigade says investigations are underway.

"Fire crews arrived and there were reports that there were people trapped, they mounted an aggressive offensive attack, went in through the fire escape and up the stairs and quickly dealt with the fire," he said.

"Fire and rescue crews did a complete search of the building and everyone was accounted for."

The hotel is situated on the corner of City Rd and Broadway and traffic is building around the area. It is advised to avoid the area.