Copying the folder locally and opening from the copied folder resolved the issue. No idea what's happening here, but at least I am able to continue working now.
Have you tried cleaning the deployment directory (Project / Clean deployment directory)?
I am also able to replicate the issue using MxBuild.exe:
Starting build for Mendix Project file: C:\Users\blah\bluh\bleh.mpr
Using the following options:
* Build target: Package
* Deployment package file: testbuild.mda
Reading project file...
Building project...
Executing step 'Synchronize with file system'
* Synchronizing with file system...
Executing step 'Initialize'
* Preparing deployment...
Executing step 'Check prerequisites'
* Checking for errors...
Executing step 'Clean deployment directory'
* Cleaning deployment directory...
* Cleaning deployment directory...
Executing step 'Prepare deployment'
Executing step 'Build deployment structure'
* Writing files...
* Compiling Java...
* Generating integration files...
* Copying files...
ERROR: An error occurred while copying files.
One or more errors occurred.
BUILD FAILED