Police say a man living in an apartment block near Newcastle travelled to Sydney and stayed with a friend before returning and testing positive to COVID-19.
Residents at the apartments on James Street are not allowed to leave the building and may be put into a hard lockdown for two weeks.
Officers have been stationed outside and health officials in full protective gear have been seen going into the apartments.
Lake Macquarie police were told a 52-year-old man living in Windale recently went to Marayong in Western Sydney and returned over the weekend.
He was given a $1,000 fine for breaching the public health orders and was told not to leave his apartment.
Police say they did a welfare check on Tuesday morning and saw the man's health had deteriorated and he was taken to John Hunter Hospital for treatment.
Residents are being tested on-site.
Local woman Janice Lettice says it has come as a shock.
"Someone told me that there was COVID here and I thought, 'Oh my god, that's right next door to where I live,'" Ms Lettice said.
Hunter New England (HNE) Health is urging anyone who went to the apartments from the evening of Friday 20 August to the morning of Tuesday 24 August to get tested and isolate.
Community groups check on residents
David Gibson is the manager of the BaptistCare Hope Street Community Centre in Windale and says a lot of people will be affected.
"It's a couple of three-storey buildings so it's a substantial amount of units," he said.
"The apartment block itself is a very transitional type of living.
"So I know some clients that have only just moved in there."
HNE Health is reminding people who live in apartments to wear a face mask when moving around their lobby, lift or stairwell and to keep them on when using shared facilities.
"There's lots of elderly neighbours there and I'm no spring chicken either," says Tina Morgan who lives in a neighbouring building.
"I've got underlying health conditions and I've been fully vaccinated, but it's a scary thought."
The BaptistCare group is providing welfare checks on residents and preparing to offer more support if the residents are not allowed to leave soon.
"I know that a lot of our clients in that complex are obviously feeling quite worried," Mr Gibson said.
"They just don't know which way to go.
HNE Health says it's working with Wesley Mission and is planning to provide food and support for the residents in case a hard 14-day quarantine is needed.
