The U.S. program to kick-start commercial-mortgage lending has failed to produce new debt sales since it began in June, delaying efforts to revive the market for bonds tied to shopping malls, office buildings and apartments.

The fourth monthly deadline under the Federal Reserve’s Term Asset-Backed Securities Loan Facility aimed at commercial real estate is today, and no deals have emerged. The program was expanded to include newly issued commercial mortgage-backed securities to stave off a wave of foreclosures as borrowers are unable to refinance amid a pullback in lending and a 36 percent drop in property prices from their October 2007 peak.

The pipeline of potential issuers under the program is shrinking as real estate companies turn to the unsecured debt and equity markets to raise capital. The longer it takes to get the first sale done, the less likely it is that the program will contribute to reviving the $700 billion commercial-mortgage backed bond market, stem a rise in defaults and loan extensions, according to Aaron Bryson, an analyst at Barclays Capital.

“The slow start is likely reflective of longer term concerns around CMBS,” he said in an e-mail. “We continue to expect a slow recovery.”

The government has made aiding a recovery in commercial real estate a priority. On Sept. 15, the U.S. Treasury Department adopted rules that will make it easier to extend the maturity of potentially troubled commercial real estate loans as part of its efforts to stem defaults.

Sales Slump

Delinquencies on commercial mortgages bundled into bonds have surged to 3.23 percent, compared with 0.5 percent a year ago, according to Moody’s Investors Service. An estimated $410 billion in commercial mortgages bundled and sold as bonds may have difficultly being refinanced, according to Frankfurt-based Deutsche Bank AG.

Sales of commercial mortgage-backed debt slumped to $12.2 billon last year from a record $237 billion in 2007 as the credit crisis sapped demand, choking off financing to borrowers with maturing debt, according to JPMorgan Chase & Co. data. There have been no sales this year.

Restrictions imposed by the Fed and rating companies on properties used as collateral may be holding up the process, as well as a lack of demand for lower-rated bonds, Bryson said.

“In a market where commercial real estate is the next thing to get hit, the Fed is appropriately being cautious with its money,” said Chip MacDonald, a partner at law firm Jones Day in New York. “There is an overhang of risk, and it’s slowing down the process. This is not a hospitable environment to meet the credit criteria under TALF.”

Six-Month Extension

The TALF was opened in March to revive the market for securities backed by consumer loans. The program draws investors by offering Fed loans toward the purchase of top-rated debt. Originally slated to expire Dec. 31, the program was extended through June for newly issued commercial mortgage-backed debt.

Banks and finance companies including New York-based JPMorgan and American Express Co., Charlotte, North Carolina- based Bank of America Corp., Fairfield, Connecticut-based General Electric Co. and Dearborn, Michigan-based Ford Motor Co. have sold about $79 billion in debt backed by everything from auto loans to small-equipment loans eligible for the program, according to Bank of America data.

The unsecured debt market has opened up to real estate companies, alleviating some of the pressure on borrowers to issue through the government program, according to Patrick Sargent, president of the Commercial Mortgage Securities Association, a trade group.

REIT Participation

Simon Property Group Inc., the biggest U.S. shopping-mall owner, sold $500 million of debt due in 2014 in August. The Indianapolis-based company isn’t considering issuing debt through TALF “at this point,” Chairman and Chief Executive Officer David Simon said in an interview Sept. 15.

Several smaller real-estate investment trusts also tapped the unsecured debt market last month, including Edison, New Jersey-based Mack-Cali Realty Corp. and Rockville, Maryland- based Federal Realty Investment Trust, according to data compiled by Bloomberg data.

There is at least one TALF sale expected in October, said CMSA’s Sargent, who is a partner at Andrews Kurth LLP, a Dallas- based law firm.

Developers Diversified Realty Corp., based in Beachwood, Ohio, is likely to be the first company to test the program, according to a person familiar with the offering who declined to be identified because the deal is still being worked on.

Developers Diversified isn’t commenting on TALF “at this time,” said Betsy Keck, a spokeswoman.

Other companies considering issuing debt eligible for TALF are Oak Brook, Illinois-based Inland Real Estate Corp. and New York-based Vornado Realty Trust, according to two people familiar with their plans who declined to be identified because the discussions are private and no decisions have been made.

Matthew Tramel, a spokesman for Inland, declined to comment in an e-mail. Roanne Kulakoff, an outside spokeswoman for Vornado, declined to comment.

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