While Wall Street shrugged off Friday’s dismal employment report — the Dow Jones Industrial Average rose nearly 40 points — the loss of 663,000 jobs in March portends more weakness for U.S. commercial real estate.

“It means that we’ll see several more quarters of negative absorption, rising vacancy rates and softening rental rates,” predicts Bob Bach, chief economist for Grubb & Ellis, headquartered in Santa Ana, Calif. “This will translate into further pressure on net operating income at the property level with upward pressure on delinquency, default and foreclosure rates. I do take solace from the fact that it was within the range of expectations.”

The national unemployment rate rose from 8.1% in February to 8.5% in March and now stands at a 26-year high, according to the U.S. Labor Department. Adding insult to injury, January job losses were revised from 655,000 non-farm payrolls to 741,000. Since the recession officially began in December 2007, the economy has lost 5.1 million jobs.

“The ripple effect continues,” explains Hessam Nadji, managing director of research services for Marcus & Millichap Real Estate Investment Services based in Encino, Calif. “I truly believe that what happened in September and October 2008 when interbank lending and the commercial paper market shut down was a trigger that took us from a serious recession and a credit crunch to really an extreme downturn, especially when it comes to jobs.”

When short-term credit was temporarily cut off for thousands of small and mid-sized businesses as a result of the commercial paper market seizing up, employers were forced to cut expenses, including payroll, says Nadji.

How widespread was the distress in the March employment figures? The only employment sector to post gains was education and health services, which added 8,000 jobs. Manufacturing continued its downward slide, with job losses totaling 161,000 for the month. Employment in construction fell by 126,000 in March and has dropped by 1.3 million since peaking in January 2007.

Meanwhile, the professional and business services sector lost 133,000 jobs in March for a total of 767,000 since December 2007. “The magnitude of job losses for March is consistent with the upward march of office vacancies,” says Victor Calanog, director of research for New York-based Reis.

National office vacancy rose by 70 basis points from 14.5% to 15.2% in the first quarter of 2009, according to Reis. “For markets with a high share of jobs in the financial services sector, we're seeing record declines,” says Calanog.

As the recession deepens, the retail and lodging industries remain especially vulnerable. Retail employment fell by 48,000 in March. Since peaking in November 2007, retail jobs have declined an average of 44,000 monthly. Meanwhile, the leisure and hospitality sector shed 40,000 jobs in March and has lost 351,000 jobs since December 2007.

“I think the job losses are step two of what the hotel industry is hitting with decreases in revenues and decreases in demand across the board, but specifically at the higher end of the market,” says Jan Freitag, vice president of global development for Hendersonville, Tenn.-based Smith Travel Research.

Occupancy for luxury hotels plunged to 58.9% at the end of February from 70.7% a year ago. Revenue per available room dropped to $153.94 from $215.50 during the same period, according to Smith Travel.

“Those decreases in demand translate directly to losses of part- and full-time jobs. If you think about, if there are less rooms being cleaned, you need less cleaning staff. If there are less meals being served, you need restaurant staff and so forth,” says Freitag. As consumers tighten their purse strings, items viewed as discretionary spending, like travel, are being cut, he says.

Bach of Grubb & Ellis notes that while today’s jobs report was bleak, the labor market is a lagging economic indicator. “The monthly losses have fallen within the same general range since November, ranging between 600,000 and 750,000, which suggests that the labor market is bouncing along a bottom.”

Bach points to the stock market as a potential leading indicator, noting that the Dow Industrials have gained 20% over the past four weeks. “The stock market is responding at least in part to a number of recent economic indicators that came in better than analysts had expected including factory shipments, durable goods orders, vehicle sales and existing home sales.”

The fact that several indicators may be fueling the stock market’s bounce “raises the possibility that the pace of economic decline is slowing and the economy is approaching a bottom,” Bach explains.

Nadji of Marcus and Millichap says that he expects the extreme high level of job cuts to ease sometime in the second quarter of this year. “We’re still in for a few months of pretty serious job losses before we start to see the employment market bottom out.”

Vacancies will rise at a rapid pace in all commercial real estate sectors in the second quarter with one notable exception, Nadji says. “I think that apartment vacancies will go up, but not quite as dramatically as retail, office and industrial.”