It’s been a big year for the Arizona Biltmore Resort & Spa. The storied resort is celebrating its 80^th anniversary, just opened a new hotel within the resort (Ocatilla) and received approval for a $600-million expansion and renovation project. The news hasn’t been all good, though. The Biltmore, like any resort, and maybe more so because of its iconic and luxurious stature, has faced steep challenges from the AIG Effect, reduced group travel and the overall economic downturn that has hit Phoenix harder than most cities.

Architectural drawings are underway for the first phase of the massive expansion, which will see $300 million spent to build 300 new guestrooms, a new spa with underground parking and an expansion of the main pool. The project should break ground next year, says General Manager Andrew Stegen, and take three to four years to complete. Once done, a new restaurant, more underground parking and 88 new rooms or condos will be added, which could take another five years.

The second $300 million is part of the 30-year plan to eventually demolish the current parking structure, move it all underground and add another 300 rooms. The 738-room hotel could have 1,500 rooms when all is said and done.

“This master plan is very valuable for us now, or anybody in the future,” says Stegen, “because it gives us a roadmap of what we can do. And in all honesty, none of it has to be done, or all of it can be done. The economy will drive that.”

Ocatilla opened in February with 120 club rooms featuring custom furnishings, the private Ocatilla Pool and Ocatilla Executive Lounge offering exclusive amenities. The spacious 500-square-foot Club and Club Deluxe guestrooms are Frank Lloyd Wright-inspired with modern touches. Wright was a design consultant when the resort was built. The Biltmore is now a part of Hilton’s Waldorf=Astoria Collection and owned by Morgan Stanley and Pyramid Advisors.

Stegen took some time recently to chat about the expansion and how the resort has fared during the downturn.

Tell us about Ocatilla?

It was finished in February from an existing building. It’s 120 keys. We made the whole building a concierge level with upgraded bedrooms, bathrooms…more of a five-diamond experience. The goal, from a design aspect, was to really have a sense of place, no matter where you are, you understand you’re at the Arizona Biltmore. The building is only 10 years old, but it has a sense of history and fits with the rest of the Biltmore.

How has it fared since opening?

We’ve had great success. About a year ago we had hoped to have a $50-$75 rate premium and we’ve achieved that. It was a $9-million project.

So what’s the deal with the $600-million project and this Planned Unit Development?

We needed city approval to rezone the property (the Biltmore was zoned residential when it opened in 1929). We started about a year go with this Planned Unit Development, which is legislation new to the city of Phoenix. Basically it’s a master plan for the next several years. We were the first planned unit development approved so it drew a lot of attention for that, and because it was the Biltmore.

That’s on top of the recent additions of Ocatilla, the renovated ballrooms and new restaurant?

Yes, that was $21 million spent in the last year or so. It’s been very seamless. The construction hasn’t been too close to any guestrooms so it’s been a very minimal disruption.

So about the bad news…

2009 has not been great for us. From November to April we had about 25,000 group rooms cancel and 18,000 were for 2009. Of that 18,000, the majority were financial companies, which historically we’ve done very well with.

The AIG Effect?

No, I will say very few of those if any were canceled for perception. Most were canceled before perceptions were an issue. AIG broke in January, ours were more just a pure lack of funding. We’ve had little perception cancellations.

Have things started to improve?

We’re encouraged and feel it’s slowly coming back…a lot of window shopping by groups. We just have to get them in the door. We see it as a 12-  to 18-month recovery, but we believe we’ve hit bottom. As you know in the meetings business, it’s always a delay in hotels because the day a CFO says you can go spend ‘X’ amount of money at a meeting, it’s six to seven months until that is held.

So how have you overcome all that lost business?

We have put more emphasis on leisure. Our leisure roomnights are up 40 percent, but ADR has dropped 15-20 percent as we’ve gone for volume. We’ve marketed in areas we haven’t traditionally done: social media, Internet, Expedia, Travelzoo. We’ve also marketed locally for staycations. We’re offering an all-inclusive package for a one-night stay for $199 at Ocatilla.

What’s been the split of your business through the years?

Historically we’ve been 70 percent group, 30 percent leisure. (Leisure) is not something we ignored, but we weren’t focused on it either. Now we are. On the group side, these financial companies aren’t going to come back in a big way for a long time, so we’ve shifted our marketing to associations. It’s not recession proof, but they book so far out—they’re booking for  2013, 2014, 2015 now—the activity hasn’t slowed for their booking. It’s more the short-term groups that have fallen off the radar.

What else can you do?

We’re targeting privately owned companies, where they’re not as susceptible to public opinion.

So how bad has the year been?

Our RevPAR (index) is still over 100 percent; we’re leading our market. Year to date through July, our occupancy year over year is down 13 percent and ADR is down 20 percent.

Are you ready for the Lodging Conference?

We’ve been a little concerned about attendance, but we’re encouraged as we get closer to the date more bookings are coming in.

Has that part of group travel fallen off, too?

In addition to the economy, our biggest challenge is the perception that it’s not OK to meet at luxury resorts. We’re battling that and it’s not helping us at all. We’re hoping that will change and people will start meeting. Meetings have to happen. As people strategize for recovery, we’re hoping that with the perception issue calmer heads prevail. The Phoenix area has been hit by $100 million in cancellations, that’s just $11 million in room tax alone. That’s a lot of money we’ve lost. We’re only hurting ourselves. All that negative publicity is hurting. We’re still in the midst of it. I don’t think the perception is changing, but it will. But not like it was before. They will start to meet again, hopefully sooner than later, but they won’t be spending as much.

And during all of these challenges, ownership is willing to invest $300-600 million in the resort?

It’s a testament to Morgan Stanley. This is the time to put money into it and when the economy does recover, we’ll be well positioned. Money is tight, but our owners have a long-term view, which is encouraging.