Network extension has many restrictions and limitations, but extending NSX overlay is supported when the connector side uses NSX and NSX Manager is registered on HCX Manager via port 9443.
NSX-T Overlay and NSX-T VLAN networks can be extended. These extensions are always created as NSX Overlay networks at the destination. HCX Network Extension is always to NSX Overlay networks. Pre-created segments in the vSphere Distributed Switch, CVDS, or VLAN transport zone, cannot be used as a destination.
When trying to extend the overlay network, it failed with the error "Network used as backing for overlay network cannot be extended".
This is when the Overlay transport zone is not selected when configuring the compute profile and service mesh.
For on-premises NSX deployments:
For other restrictions and limitations, please review the "Restrictions and Limitations for Network Extension" section in the VMware HCX Product Documentation.