During a press conference today police said officers fired several shots.
The victim was known to police but he is yet to be formally identified.
Assistant police commissioner Allan Boreham said police deal with thousands of critical events each year and it's always unfortunate when police have to use deadly force.
He said he "absolutely" backs the Armed Offenders Squad. "On the information I have it appears this was unavoidable."
A man working in a separate part of the building at the time reported hearing around three gunshots.
Police say there were possible gang connections to the Grasslands Place address, in an industrial area in Frankton, Hamilton.
Boreham said police were searching the property in relation to an ongoing investigation into the supply of methamphetamine and firearms.
He said the operation was a long time in the planning.
Information gathered through the course of the investigation suggested possible gang connections to the address, he said.
"Upon entry to the building, officers announced that they were armed police," Boreham said.
He said a man inside the building picked up a long-barrelled firearm and cocked it "in very close proximity" to police.
"Despite being called upon multiple times, he continued to present the firearm and was subsequently shot."
Boreham said the premises were very cramped and officers took the man outside and administered first aid until the ambulance arrived.
The 36-year-old was pronounced dead at the scene.
"The scene was immediately shut down and has been guarded overnight and, as is standard, an investigation into the circumstances of the shooting is under way."
Police have confirmed that a firearm and ammunition have been found where Marshall was shot dead.
A pump-action shotgun and a live cartridge have so far been located where Marshall was standing, a preliminary scene examination has revealed this morning.
A wider search of the building is ongoing.
Long-time family friend Drew Hansen said he didn't believe Marshall would have raised a firearm at police.
Hansen, who has known Marshall for 15 years, said it would have been out of character for Marshall to challenge police.
"He was really gentle. He was a cool guy. He taught me a lot. It's a bit of a shock."
Hansen said Marshall was "into cars" and fixing guns.
"He loved cars. I used to spend a lot of time down there fixing my car."
Tributes have also been pouring in on Nelson Marshall's Facebook page this morning.
One wrote, "so many times and memories of Nick the BFG. Gone too soon. Thinking of you and marg and mads xxxx", another wrote "Just absolutely gobsmacked to wake up to this news. We all have so much history and had some fantastic memories. Nick was one of the gentlest people. Thinking of you all xxx".
One wrote, "OMG so sorry Nick he was a really neat kind guy WTH oh such shock sorry Nelson Marshall RIP Nick you where [sic] a neat guy definitely didn't deserve to go out this early," while another said "words can not express my feelings right now Nelson, what can I say right now to help you and Marg. Simple answer is nothing".
A woman known to the dead man was also in the building, in a different area.
She has given an initial statement to police but will be spoken to further as the inquiry progresses, Boreham said.
Daya Singh, who has run car repair business DS Tyre & Mechanical Repairs out of the front part of the building on Grasslands Place for about a month, was at work at the time of the shooting.
He said he had little to do with anyone else at the premises: "they hardly talk to me."
Singh was present when police arrived at the property last night.
"The cops came over and they started yelling at the people inside to come out, then they rushed into the building."
He said after that he heard "three or four" gunshots.
The Independent Police Conduct Authority has been advised.
The original investigation into methamphetamine supply and firearms is ongoing.
A full scene examination is under way and is expected to take several days.
Police quizzed people returning to work within the cordoned area this morning, and noted their details before letting them through the cordon, which was guarded by armed police.
A witness reported hearing shots in the area as police officers swarmed surrounding streets and put up cordons.
A cordon also surrounded the building where the shooting happened and a police caravan was set up outside.
Locals said the building is broken up into three areas.
The front section is a mechanics' workshop, which has been running for a month or so.
The rear two sections were being used "for other things" locals said.
One business owner who was working last night wouldn't comment about the shooting, just saying that the police do a great job but unfortunately it went wrong last night.
Several officers in hazmat suits were seen leaving the site in a number of vehicles shortly after the shooting last night.
A bus driver, who asked not to be named, said there was a huge police presence on site.
"I was driving past and I saw the police at the intersection with Kahikatea Drive. One of them had his police vehicle [blocking the road], with its lights flashing, and a rifle.
"When I saw the rifle, I thought: 'Yep, something's going down there'."
