Students and staff at three university towers were evacuated at 11:30 a.m. Thursday, the Sydney Morning Herald reported.
Firefighters were working to "neutralize" the chemical, the newspaper said.
New South Wales Fire and Rescue Superintendent Tom Cooper said an emergency call came in after bottles containing crystallized picric acid were discovered.
"The danger with this situation is that when picric acid crystallizes it can form an explosive mixture in air and if it's not dealt with in the proper manner before it's moved it could cause an explosion," Cooper said.
Broadway was briefly closed in both directions between Harris Street and Regent Street at Chippendale, and was reopened just before noon.
The bomb squad was on the scene and the situation was "under control," Cooper said.