An additional 21 bedrooms will be created meaning the hotel will soon boast 159 rooms.
And a separate retail and restaurant area will also be constructed and run by an independent operator.
Property Developer Ashall Projects (MB) Ltd will carry out the extension which, funded by Sherland Property, a consortium of private investors, in partnership with Middlesbrough Council.
The Cook and Endeavour House building in Albert Road had lain vacant for 15 years until Ashall carried out a £12.4 million development in 2014.
The latest expansion of the hotel will create 10 jobs in the restaurant.
Mark Ashall, Director of Ashall Projects, said: “Thanks to the soaring demand for rooms at the Holiday Inn Express Middlesbrough, we are delighted to be extending the facilities to ensure more people can come and enjoy what Middlesbrough has to offer in comfortable surroundings.
“The demand for the next phase of the development reflects both the progress made by the Council and others in attracting businesses to the town and level of customer service provided by the staff at the hotel. It is due to complete in January 2017.”
Alison Brister, of Sherland Property, added: “Our investors are very pleased to be able to provide the further funding necessary to regenerate the former Permanent House and, in doing so, create further employment opportunities in the area.”
Holiday Inn Express is a growing brand for business trips and weekends away.
Mark Winter, General Manager at Holiday Inn Express Middlesbrough, said: “Since opening last year, the hotel has proved even more popular than we anticipated. I’m thrilled that the extension has been given the green light and look forward to welcoming even more guests to the hotel to experience the team’s fantastic service.
“We’ll also be looking for more people to join our team when the new bedrooms become available, which is great news for the local area.”
Councillor Charlie Rooney, Middlesbrough Council’s Executive Member for Regeneration, said the council backed the Holiday Inn Express project from the outset because the potential for the town centre was clear.
“In less than a year the hotel has surpassed expectations, providing a first class service and adding a new dimension to Centre Square as one of the town’s main focal points,” he said.
“The planned expansion will take it on to the next level, with the potential to create new jobs and further develop Middlesbrough as a leading destination for both business and leisure.”