The issue was fixed by removing files key from the root tsconfig.json. This is however different than what docs recommend to do.

Another good practice is to have a “solution” tsconfig.json file that simply has references to all of your leaf-node projects and sets files to an empty array (otherwise the solution file will cause double compilation of files). Note that starting with 3.0, it is no longer an error to have an empty files array if you have at least one reference in a tsconfig.json file.