The "Arrange By" feature uses the "Windows Search" service, more known as the indexing service, for property caching. This means that you should have this folder indexed. So first you should make sure that this service is enabled and running. Though, if you're able to change the item in the "Arrange By" context menu then your service should be running. Just to be sure, press [WIN]+R and enter "services.msc" without the quotes. If you're having trouble finding the windows key: it's located between the left ctrl & alt key, sometimes there is also a fn key. So now you should have a window like this:

Scroll down to the bottom and find the item "Windows Search". Right click the item, click properties, change the startup type from "Disabled" to "Automatic (Delayed Start)", and then click start. Now, to index your library folder you're going to have to click the expandable triangle next to your library folder.
Here's an example:

Now right click the folder inside the library and click properties to get this window:

Now click on "Advanced" and tick the box that says "Allow files in this folder to have contents indexed in addition to file properties". Click ok, then click apply and wait for the contents to be indexed. Right click in the folder and click "Refresh" and the objects should now show up. Depending on how much content you have and the performance of your computer, it may take a while for everything to show up. Hope this solves your issues, cheers!

P.S. If thumbnails or album art doesn't show then you need to rebuild you thumbnail cache by using the "disk cleanup" utility. iTunes and Windows Media Player can be used to embed album art to ID3 tags. Click the links for more information.