This is what I got from support:
"That is indeed a deployment regression that went with our latest release that's causing this issue and break new workspace creations. We have a fix for it that should be in production in 12 hours from now.
However, a workaround would be to separate your ruby workspace's environment from our shared space installation:
edit ~/.bashrc adding the line to the end of the file (using nano or vim):
export GEM_PATH=$HOME/lib/ruby/gems
Then:
$ source ~/.bashrc
$ gem install rails -v 3.2.16
$ bundle install