The blaze erupted in the first floor Italian restaurant at 1408 Madison Ave., near East 98th Street, erupted in flames about 8:15 a.m., according to the FDNY and witnesses.
About 30 minutes later, the fire climbed to the second and third floor apartments above, Deputy Chief Anthony Devita said at the scene.
Raymond Velez, a super for several Madison Avenue buildings, stepped outside Tuesday morning and smelled something "like burning wire," he said.
"I saw a vent and a big black cloud of smoke came pouring out. It was getting darker and darker. It was scary. There was smoke coming out of everywhere," Velez said.
"There was a tremendous amount of smoke coming from the windows. It started yellow, then it was black," said neighbor Barbara Tomasino, 62.
''I started ringing bells and yelling, 'Evacuate your building. There's a fire,'" Velez said. ''A lot of people came running outside. Some had suitcases, their dogs, their cats, whatever they could get.''
The blaze was brought under control about 9:30 a.m., according to the FDNY.
One person and two firefighters suffered minor injuries, a deputy chief said at the scene.
Tre Otto was opened in 2009 by Louis and Lauren Cangiano, according to their website.
Neighbors said the Cangiano's had made an effort to cement their restaurant's place in the community.
"This is a terrible thing to happen to them. It's a good restaurant. They work so hard," Tomasino said.