The neighbouring former post office on Lichfield Street is set to be transformed to create The Green Room, which will host exhibitions, concerts and more.
Planning permission has been granted and the Grand is now in consultation with the owners of the building to purchase the land.
The theatre will then need to raise money to finance the expansion, which city leaders say will enhance the city as an entertainment destination.
News of the development comes in the Grand’s 125th anniversary year and bosses hope it will help shape the future of the venue.
The Green Room will act as a community venue and as well as hosting performances will also be available for exhibitions, concerts and local groups.
The theatre has been given the nod to progress with the build after the plans were signed off by the city council.
Chief executive and artistic director Adrian Jackson said it was not yet known when work would start but that his aim was for it to be completed “as soon as possible”.
Mr Jackson said: “I am absolutely delighted to be moving onto the next stage in this exciting project which supports and enhances the regeneration of Wolverhampton city centre.
“The potential of this second space will contribute to the Lichfield Street Arts Hub vision.
“The opportunity to build upon our already thriving community, educational and cultural offering is thrilling.”
'Re-inventing our city centre'
Councillor John Reynolds, economy boss at Wolverhampton Council, said: “This is a bold move by Wolverhampton Grand Theatre to bring a major uplift to the city centre’s entertainment offer.
"We are re-imagining and re-inventing our city centre and an outstanding arts and culture offer enticing new audiences and visitors is a fundamental part of that.”
International architect Keith R Williams, who has worked on projects at various buildings, including the Birmingham Repertory Theatre and London’s Unicorn Theatre, has designed The Green Room.
He said: “In its 125th anniversary year the granting of consent by the city council is an important moment in the history of the Grand Theatre.
"The proposed pop-up theatre when realised will be an important stepping stone toward creating a vibrant new performing arts complex alongside Charles Phipps’ magnificent theatre of 1894.”
Adrian Jackson, chief executive of Wolverhampton Grand Theatre, said he is “thrilled” plans to expand the historic venue have been approved.
Mr Jackson said he hoped work would start as soon as possible but that there were no firm timescales as yet.
Mr Jackson told the Express & Star: “The most important thing is it will allow us to be experimental in the work we can do. It is going to have its own identity as a stand-alone venue and we will be encouraging all parts of the community to use it.
“It will be a very different offering to the Grand Theatre but will compliment what we do at the Grand Theatre. Performances will be in a more intimate, in a studio setting.
“It will be versatile, we can change the setting very easily. We can use it as a conventional theatre or we will be able to retract the seats, lay astroturf or have plants in there and make it a different experience. It won’t just be performing arts, it will be visual arts and exhibitions and a host of new, innovative projects.
“If someone approaches me about an event for a mother and baby group or a rock concert we can accommodate that.
“We want to give the community a chance to be creative, in a more intimate space that is less daunting to perform for people who are just starting and finding their feet. It will enable the Grand Theatre to expand its cultural offering.”
Mr Jackson said he was excited about the potential for The Green Room.
“I think it’s fantastic,” he said. “When I first arrived here in 2015, in my head I had a vision for that site next door, I wanted to extend the footprint of the Grand.
“In order for us to respond to the demands of the future and make sure the site delivers culture for the next 125 years we have to do something different without interrupting what we are currently doing at the Grand.”
He added: “The most important thing is we have got planning permission to deliver it now and we have got to put lots of plans into place. We are going to start work now and want to deliver it as soon as possible.”