Last watched sorting is available for owned collection but not available for custom collection.
It is available with a slight detour via filters.
Walkthrough: Settings -> Filter Sets -> + -> Enter a name, e.g. "Custom Last Watched" -> Save Filter Set ->click the set to edit -> set "Sort: Last watched" -> save by clicking "Done" -> switch to custom Collection -> click magnifying glass for search -> more -> Folder Symbol -> choose your Filter Set -> Done
The filter stays on permanently.
PS Had the same need for my Custom Collection where I record my watched Netflix movies.