In particular, I believe that https://github.com/dotnet/arcade/blob/main/eng/common/tools.ps1#L85 is somehow not handling quoted variables with spaces correctly. See: dotnet/fsharp#18143. In that PR, I've fixed some of the other space-handling issues in the F# build scripts, and when debugging it seems to pass $commandArgs correctly (with paths quoted) but the output indicates that MSBuild is still not getting the correct parameters.
To repro, clone that PR into a directory with spaces, then run .\build.cmd (which should succeed) and then .\build.cmd -testCambridge -c Release -ci -nobl (which will fail)