We got this escalated through our Premier support to a level 3 tech. They took over our machine. We did some changes to permissions to both the AAD user (local) and the MSOL user (on-premises AD). The tech also did some stuff in the registry. I did not get the details. In the end, things worked fine.
We were able to get past Configuring .... and were able to use the MIISclient tool to select the OU we want to DirSync.
Sorry I cannot give you a solution. The problem has to do with the fact that we have a ROOT domain and a child domain.