Emergency services were called to the rear of the old Kinnears factory on Ballarat Road at Footscray about 11:30pm following reports of a fire and explosions.
Crews managed to contain it to a single room at the back of the property, and took about 40 minutes to extinguish.
Three bodies were found inside and are yet to be identified but police believe the victims may be two men and a woman.
A number of squatters are known to live in the factory, and there were plans to redevelop the site into apartments.
The cause is not known and arson chemists will attend the scene to conduct further examinations.
Taxi driver Mohamed Ali was passing by and saw the fire.
He said when he got to the factory he heard screams and saw someone trying to put it out.
“When I passed the street I saw the fire over there. When I was turning I heard some screaming but I was not sure who was screaming,” he said.
“Then I saw the fire and I saw the front person was throwing water from the bucket but the fire was so large.
“A few minutes later I saw the fire engines come. For me, it’s a horrible situation because we couldn’t help. I haven’t seen anything like this in my whole life, I’m not feeling good.”