For co-simulation, the delay due to pushing the data back and forth has to be small compared to the loop gain and time constant of whatever is attempting to control the subsystem to keep the system stable ... so the aircraft will even fly. This is complicated by the long term performance being dependent on the worst case latency rather than the average latency, since the average value determines how well the feedback loop can damp out transients and the each incident of the bad latency generates such a transient.
FlightGear's terrain following autopilot uses the built in terrain (from TerraGear) which is simplistic smooth data. This enables routine users to avoid the whole issue.
I'm not aware of any hardware-in-the-loop usage, so far, but it is used as a streaming source of aircraft-like GPS data.