Update 12/21/17 See newer post here: Develop Azure Functions on any platform
Previous answer
The behavior can be a bit confusing; I've now clarified the blog post: Azure Functions Tools released for Visual Studio 2017 Update 3.
The project type is .NET Standard, but we don't currently support the .NET Standard 2.0 facades in the Azure Functions runtime. Now that .NET Standard 2.0 is RTM, we will make this update in a future release. Once this happens, you won't have to make any project changes other than changing the target framework.
Currently, Azure Functions runs only on full framework, so there is no benefit to targeting netstandard2.0. However, we are porting the runtime to .NET Core, at which point there is a difference. Once that work is complete, the New Project dialog will target netstandard2.0 by default.