The redevelopment will include a 7-level, 71-unit apartment tower at the rear of the Barkly Street block which will be used for community housing.
The existing Barkly Hotel facade will remain, and be refurbished to include a cafe at ground level and public and private art spaces on level two.
YCH chief executive officer Rob Leslie expects the new Barkly Hotel development to open its doors by November.
YCH is one of several registered housing associations working closely with the Government to increase the number of social housing units in the country. Other groups include Melbourne Affordable Housing and the Rural Housing Network.