Model Builder allows selecting a newly created output location, but does not allow it to be used

Description

If Windows Explorer is used to create a new directory while creating a model, Model Builder will allow selecting the folder for an output location, but will not allow it to be used.

Cause

This is a known issue.

Workaround

• Use Windows Explorer to create the new directory, before creating the model.
  
• Create the new folder using ArcToolbox > Data Management Tools > Workspace. This provides tools to create new workspaces.