I reported the issue to Mathworks. It was confirmed a known problem in R2019a, R2019b, and R2020a.
"Yes this is an identified issue that the build fails when the file path contains spaces."
"I have checked internally that changes have been made in the recent MATLAB R2020b release. Now instead of expanding the path, the generated makefile will stay with tokenized path, and thus resolves this issue."
It is true that re-installing Matlab on a path without spaces in the directory names is a workaround.
However, a less disruptive workaround is described below.
The following describes how the build process can be customized:
https://www.mathworks.com/help/rtw/ug/customizing-the-target-build-process-with-the-stf-make-rtw-hoo...
Look for the m-file *_make_rtw_hook.m In my case I found two matches:
.\AppData\Roaming\MathWorks\MATLAB Add-Ons\Toolboxes\NXP_MBDToolbox_S32K1xx\mbdtbx_s32k_as\mbd_s32k_as_make_rtw_hook.m
.\AppData\Roaming\MathWorks\MATLAB Add-Ons\Toolboxes\NXP_MBDToolbox_S32K1xx\mbdtbx_s32k\mbd_s32k_make_rtw_hook.m
Setting a breakpoint showed only the second script was run in my case, but I applied the fix to both.
Look for the contents of the case statement: case 'before_make'
Mathworks suggested adding the following code [to the end] of the code block for that case option:
% --- Fix for External Mode Build Error ---
files = {buildInfo.Src.Files.FileName};
filesToRemove = {'rtiostream_utils.c'};
removeIdxs = cellfun(@(x) strcmp(files,x), filesToRemove,'UniformOutput',false);
removeIdx = any(cell2mat(removeIdxs'),1);
if (~isempty(files(removeIdx)))
buildInfo.Src.Files(removeIdx).Path = '';
end
The filename in bold (above) must match the filename on the troublesome code on Line 621 of the makefile.
With the this fix in place the build completed successfully, downloaded the executable to the board, and the application started running with the blue LED flashing.
Note the Target Connection configuration needs to be set properly for the code to be deployed and run successfully:

There is one remaining challenge, however, given the knob on the dashboard has no effect on the duty cycle of the flashing LED, and the scope does not show any activity from the board; it is as if the application runs on the board without any persistent connection to Simulink, as one would expect from External Mode. It is if the example is not running in External Mode. But I cannot see any options or settings to turn it on.
Any suggestions for overcoming this last challenge are welcome.