Smile and say 'Pity you are already in a relationship...' And leave it at that.
If he pushes/pursues laugh at his little joke... treat it like a joke and tell him you think he is being funny.
Eventually it will dawn on him that you take his relationship with his other half seriously, even if he doesn't.
Also understand that if he is willing to step outside of his relationship for you, he will be that willing with anyone else if he was with you.
As for the good friend part... I strongly suggest you start rethinking your definition of 'good friend'... this sort of behavior I personally do not see as 'good friend' material.
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If this circle jokes around the way he is, it seems possible that, considering your feelings, you may be noticing it more because you like him. Try thinking how it might have come across if you weren't interested.
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