OED lists the noun “terrace” for a row of houses (OED sense 5) and derives it from the fact that these rows were originally built on earth (purposely?) raised slightly from the street and known as a terrace (ultimately from L. terra, earth, see OED’s etymology below, OED sense 1a—early example of sense 1a, 1611, from the King James Bible); so the use of “terrace” for a kind of ground-floor balcony as it’s often used today would also be derived from sense 1a. (The “natural formation” sense mentioned at #5 is listed in OED at senses 2a and b, first recorded use 1674.)
Etymology: < French terrace (12th cent.), also terrasse , tarrasse (15th cent.), rubble, a platform, a terrace, = Italian terraccia , -azza bad earth or soil, ‘filthie earth’ (Florio), also a terrace, later †terraccio , now terrazzo , Spanish terrazo , Portuguese terraço terrace, medieval Latin terrācea , -ācia an earthen mound, a raised terrace, a flat roof, terrācium useless earth (Du Cange) < Latin *terrācea feminine of *terrāceus adjective, earthen, of the nature of earth, earthy, < terra earth: compare -aceous suffix. This suffix was in the Romanic languages used to form nouns, similative, augmentative, or pejorative; hence the primary sense, useless earth, heap of earth or rubbish, whence earthen mound made for a purpose. See also tarras n. (formerly terras, terrace), a differentiated form of the same word in the sense ‘rubbish’, ‘rubble’, as in Italian and Old French.
1. a. A raised level place for walking, with a vertical or sloping front or sides faced with masonry, turf, or the like, and sometimes having a balustrade; esp. a raised walk in a garden, or a level surface formed in front of a house on naturally sloping ground, or on the bank of a river, as ‘The Terrace’ at the Palace of Westminster.
5. A row of houses on a level above the general surface, or on the face of a rising ground; loosely, a row of houses of uniform style, on a site slightly, if at all, raised above the level of the roadway.
(Common in street nomenclature; Adelphi Terrace (formerly Royal Terrace), London, is one of the earliest examples.)
1769 Lease 23 June in Mortgage (1782) 20 Aug. A parcel of Ground..[which] adjoineth towards the north on vaults situate under the houses built on The Royal Taras [Adelphi, London].
1796 New Plan of London [has] ‘Lambeth Terrace, behind Lambeth Palace’.
1839 Penny Cycl. XIV. 113/2 The terraces in the Regent's Park, Hyde Park Terrace near Bayswater, and that in St. James's Park.
1850 C. Kingsley Alton Locke I. i. 1 My earliest recollections are of a suburban street; of its jumble of little shops and little terraces.