The hangover in the U.S. labor market is slowly wearing off, but real estate economists say that any celebration is premature. Non-farm payrolls fell 345,000 in May, far less severe than the consensus forecast of 525,000. Since the start of the recession in December 2007, the economy has lost more than 6 million jobs, reports the U.S. Labor Department.

What can commercial real estate owners, developers and lenders read into the May jobs report?

“It has taken massive fiscal stimulus and quantitative easing (the Fed buying Treasury bonds and mortgage-backed securities) to get us to this point, and we're still not sure if the economy will be able to transition from less bad to good — in other words a moderate, self-sustaining expansion,” says Robert Bach, senior vice president and chief economist for Santa Ana, Calif.-based Grubb & Ellis.

But a body of evidence is growing that the economy is climbing out of the abyss, says Bach. A number of economic indicators have shown some improvement in the last couple of months, such as consumer confidence, durable goods orders, and a narrowing of the gap between the three-month T-bill interest rate and three-month London interbank offered rate. “But it's too early to pop the champagne corks.”

One surprise to the downside: The U.S. unemployment rate rose to 9.4% in May, up from 8.9% in April. Economists had expected a 9.2% rate. The unemployment rate is based on a survey of approximately 60,000 households.

“It took longer than expected for the extreme levels of job cuts to peak, but the trend of meaningfully fewer job cuts is finally beginning to emerge,” says Hessam Nadji, managing director of research at Marcus & Millichap Real Estate Investment Services based in Encino, Calif.

Nadji notes that the loss of 345,000 jobs in May is a significantly negative number, given the fact that a nine- to 12-month lag exists between monthly job figures and commercial real estate demand. “It will take at least through the end of 2009 before the rise in vacancy peaks in all property types,” he says.

Bach of Grubb & Ellis agrees. “Office leasing market fundamentals will get worse before they get better, and I'm afraid the improvement won't come in time to rescue many owners who are struggling to keep their loans current.”

New York research firm Reis forecasts that vacancies in commercial real estate are likely to increase over the next 18 to 24 months with rents projected to be flat or declining until 2012, or even beyond. Reis forecasts that national office vacancies will reach 18% by year's end, the highest level since 1992, when overbuilding in the sector was rampant.

However, investors will take what good news they can get. “If [the job report] restores any kind of confidence in investors and helps market activity pick up, this might result in a stabilization of transactions whether in terms of prices or volume,” says Victor Calanog, Reis director of research.

By dollar volume, the value of the sales in the office sector fell by just 7% in the first quarter. However, when excluding distressed deals — the John Hancock Tower in Boston, the former Bertelsmann building at 1540 Broadway, The New York Times headquarters, and 10 Universal City Plaza in San Fernando Valley, Calif. — dollar volume actually dropped by 48%, not 7%.

“The good news,” says Nadji of Marcus & Millichap, “is that the peaking of the job loss cycle further confirms the expectations that the recession will end this year and recovery — at least a moderate one — will begin in 2010.”