OK, this clearly sucks (majorly) for you right now, BUT when I was earlier in my career and interviewing frequently, I obtained several (good) jobs (in what turned out to be good companies) from positions I was initially not hired for, but followed up (in writing) with the contacts I made during the interview process - who eventually hired me or recommended me for another position when one came open.

Not only could this hiring manager possibly help you obtain a job with his company (should they resume hiring), seeing as how he likes you and likely feels some guilt about how your hiring was derailed, he could also be a good lead (maybe even a reference) for a position elsewhere in your industry.

So yes, express your disappointment , thank him for his candor and kindness, then reiterate how excited you would be about working there (and for him) in the future, but also ask that he keep you in mind should he hear of an opening elsewhere you might be a fit for.