In the hope this is useful to others...
A quick review of the Client Bare Metal Restore scenario
Basically, the Client Restore Service will enable Windows Deployment Services (WDS) on the Windows Server Essentials server and configure the client restore image as a boot image. With the Client Restore Service turned on, the administrator can initiate a Pre-Boot Execution Environment (PXE) boot on a client computer by using a network interface to launch the Client Restore Wizard and restore the client computer. There’s no need to prepare a client restore DVD (actually, this is not available for Windows Server Essentials), or a client restore USB bootable key.
(Note: the above paragraph was taken almost verbatim from a TechNet post for which I lost the reference; my apologies to the author.)
The simplest way to get all the tools required to build this image is to install the "Windows Assessment and Deployment Kit - Windows 10", Version 10.1.14393.0 (ADK Version 1607) : the ADK version (14393) should match the OS version as displayed in System Information settings. Three options are required: Deployment tools, Windows Pre-installation environment, and Microsoft SQL Express 2012.
When you turn on the Client Restore Service or build the USB bootable key for the first time, the wizard will try to find the WinPE image on the server. The client restore image is built by customizing a WinPE (Windows Pre-install Environment) image on the server, one each for the X86 and X64 architectures.
Building the USB bootable key inside a virtual machine
Whether the Essentials server is virtualized or not, there is no issue with implementing the PXE boot environment required by WDS.
In Windows Server 2016, there is not the kind of USB passthrough that is required to make a bootable USB key: since this is always a heated discussion, please see https://techcommunity.microsoft.com/t5/Virtualization/Discrete-Device-Assignment-Machines-and-devices/ba-p/382260 .
While I don't normally endorse any product, the VirtualHere client/server package (https://www.virtualhere.com/) implements a solution that makes a USB device appears on the native Hyper-V bus, therefore allowing any and all operations such as formatting a USB key. The native USB drivers for the device are used as is. Attach a USB key to a remote server and connect the virtual Windows Server Essentials.
To display the "Prepare the USB Flash drive" screen, open the Essential Dashboard and navigate to "Devices", "Customize Computer Backup and File history settings", "Tools" tab, "Create key" button. The USB key inserted above will appear as a local device. Confirm that files and folders on the USB key will be deleted. Eventually, you will see the message "Bootable USB Flash drive was created successfully": eject the USB key as you would normally do and you now have in hand a Client recovery key from the virtual WSE environment.
Regards,