The Microsoft app does have a mode which uses the internet to push a message saying "Is this you logging in?", which is weaker than TOTP but feeds into their "AI threat detection engine" mantra. It seems to fall back to TOTP if there is no network.
MS is clearly using this to their advantage and asking for everything they can provide even a thin justification for, but even if you're just giving them a fraction of what they're asking for it's still far worse than handing over a cell phone number. My work considered requiring Microsoft Authenticator but after enough people balked at handing over so much data to MS they caved and we got simple little keychains that do nothing but spit out numbers and can't collect our contacts, our location, or start listening using a microphone. It's hard to beat that.
From Microsoft's Authenticator help page:
"You will see a prompt from Microsoft Authenticator asking for access to your location if your IT admin has created a policy requiring you to share your GPS location before you are allowed to access specific resources"
https://support.microsoft.com/en-us/account-billing/common-q...