Bob U and I have had a number of exchanges on this question in this forum in the past and I think we both have tired of the discussion as we both understand each other's position on it. However, for the benefit of new readers of this forum let me summarize.
It is not a simple question as there is a diversion of opinions on the boglehead.org forums about it. There the discussion is whether REITS (and the REA of course is not a REIT) is either an asset class or something else (call it a subcategory).
Modern Portfolio Theory deals with asset allocation between fixed income and equity; there is nothing else and no room in their discussions for anything else. So when dealing with the basic question of asset allocation between the two, where does one put the REA? It most definitely cannot be placed in the fixed income category and thus by default it falls into "equity"; I label this categorization for the REA as "equity broadly defined." I am not saying REA is equity but that it can/has to be viewed as such in asset allocation discussions.
I have had a personal hour-long discussion with Larry Swedroe and essentially this is what he says. He also said what one can do with the REA is to "discount" it share by some factor. In my post I "discounted" the REA by 1/3 saying my 48% share is about equivalent of 32% equity ("narrowly defined").
Anyone can call it what they want but there seems to be no consensus if commercial real estate, at least as REITS, is an asset class. I sense that commercial real estate (undefined but not narrowly as only being REITS) is an asset class.
My and Sy's allocation is high; we are well aware of that. Nevertheless we have maintained it at a very high share of our investments because of what we know about it and of the statistical analysis that has been presented previously in this forum and included in some T-C posts on the web site.
The REA has been extremely consistent with very little volatility (and I will not get into a discussion about the "smoothing" effect of quarterly appraisals). Sy and I are comfortable with it. I personally am concerned about how it will perform in 2008 but I have no intention of either abandoning it or greatly reducing my allocation to it.
Hope this clarifies it as I personally do not want to get into another round of discussions on it. I know what it is and I view it as a form of equity though one with very low risk based on historic data through its relatively short life. It is its performance and risk in the future that is my current concern.
Ray
