Update for those who got this issue for VS2013 or VS2015 after upgrading a VS200X setup project using the Microsoft Visual Studio Installer Projects extension.
Following the recipe for v1.0.0.0 from MS finally made it work for me:
Microsoft Visual Studio Installer Projects
Unfortunately we couldn’t address all cases of the command line issue for this release as we’re still investigating the appropriate way to address them. What we do have is a workaround that we believe will work for almost all of them. If you are still suffering this issue then you can try to change the DWORD value for the following registry value to 0:
HKEY_CURRENT_USER\Software\Microsoft\VisualStudio\12.0_Config\MSBuild\EnableOutOfProcBuild(VS2013)
or
HKEY_CURRENT_USER\Software\Microsoft\VisualStudio\14.0_Config\MSBuild\EnableOutOfProcBuild(VS2015)
If this doesn’t exist you can create it as a DWORD.