The slowing job market chiefly reflects the housing downturn but will likely throw a damper on demand for commercial space as well, according to some of the nation’s leading economists and real estate forecasters.

U.S. non-farm payrolls rose by 97,000 in February. That’s the lowest employment growth in more than two years. “The bad news is that slower job growth means slower absorption of space, particularly for office and apartments,” says Hessam Nadji, managing director of research services at Marcus & Millichap. “The good news is that if indeed job growth slows but doesn’t stop, that will be the soft landing the Fed has wanted and we’ve all hoped for all along.”

Market observers find plenty of positive indicators in the Labor Department’s February numbers, because net job creation belies impressive employment gains in the services sector. Service providers added 168,000 jobs in February, including 29,000 in professional and business services, 39,000 government positions, 31,000 hospitality workers and another 31,000 in education and health care. That’s important for commercial real estate because the services sector is a heavy user of office space.

Dragging down the monthly job figures were huge losses in construction and manufacturing. The nation lost 62,000 construction jobs in February. Inclement weather halted a number of construction projects around the nation, compounding the problem. Meanwhile, the manufacturing sector shed 14,000 positions.

“The truth of the matter is we have an uneven economy,” says Craig Thomas, director of research at Boston-based Torto Wheaton Research. “Everything related to housing is now contracting, and everything related to services is doing fine. And the economy can’t really handle faster growth, due to (low) unemployment.”

Thomas is referring to the February jobless rate of 4.5%, which is considered near full employment. Unfortunately, many of the workers displaced from the housing industry won’t be able to fill many service provider jobs without additional training. “The folks unemployed aren’t immediately available to the strong areas of the economy,” he says. “That, coupled with low unemployment, means the economy can’t grow rapidly.”

Some experts say the economy may do more than slow, and will in fact slip into recession soon, which will halt corporate expansion plans and strangle demand for commercial space of all types. “It will get much worse before it gets better,” says James Smith, director of business forecasting at the University of North Carolina. “In a few months, it’s going to be negative (job) numbers. It’s obvious to me that we’re heading for a recession.”

History shows that each time the yield curve was inverted for at least four months during the 20th century, a recession followed in nine to 19 months, Smith says. Applying that theory to the start of the current inverted curve — which began last July — the next recession could begin anytime from May this year through March 2008, according to Smith.

Because real estate is a lagging economic indicator, Smith doesn’t expect trouble for commercial real estate owners until late next year, when the economy will already be rebounding. In 2009, he expects real estate to regain its footing and begin to benefit from the next economic expansion.

The Federal Reserve will act to stave off recession by again lowering the fed funds rate, predicts Dr. Rajeev Dhawan, director of economic forecasting at Georgia State University. Dhawan is concerned about weak job creation, and says the economy needs to create about 150,000 jobs each month to be healthy.

Fallout in the sub-prime mortgage market will also feed into the overall economic climate, resulting in excessive slowing that will stir the Fed to action. “What can the Fed do? They can at least cut rates, either in May or June,” Dhawan predicts. “They will start with a quarter point and do it a minimum of three times.”

Diane Swonk, chief economist at Mesirow Financial in Chicago, has a more optimistic view about the near-term outlook. Once the economy adjusts to declines in housing and Detroit-based automotive manufacturing, the strength of the service industries will fuel continued economic growth.

“We’re in a soft landing,” Swonk emphasizes. “We’ve got continued strength in commercial real estate, and some comeback in non-automotive manufacturing, so it’s a slam dunk — you get a re-acceleration in growth.”

Based on previous real estate cycles, Swonk does expect new construction to exert downward pressure on rents at existing properties. Just as tenants in the 1990s favored offices pre-wired for elaborate communications, today’s tenants will gravitate to modern, energy-efficient space. Hotels are also in a building boom that will lead to flattened room rates within a few years.

A real estate researcher echoes Swonk’s belief that commercial real estate will suffer some non-crippling effects from the slowed job market, but will benefit from continued moderate economic growth. “Certainly, the slowdown will impact the demand for commercial real estate, which is why we're calling for absorption to decline 20% to 40% this year among the major property types,” says Josh Scoville, director of strategic research at Boston-based Property & Portfolio Research.

“The good news is that unemployment remains quite low,” Scoville adds, “and that is spurring renewed wage growth, which should prevent the economy from dipping into an outright recession.”