Yes, there is a terrace at the Villas. It is very spacious and not crowded. Unfortunately the angle is wrong for viewing the show. You get the water show, the music and the color, but you cannot see the images projected on the waterscreen. My wife, daughter and I stayed at the villas in June of this year. The first night we tried the terrace and thought the show was okay. The second night we stayed at the park, got in our assigned space and really saw the show. It is amazing. If you have already seen it, the terrace is fine for viewing and enjoying the music, the water cannons and colors. Otherwise you need to be down in the park to really enjoy it. Some of the villas on the third floor that face into the park on the side facing California Screaming (not Grizzly Peak) may have a good view, but not sure, haven't been in them.
The Villas at Grand Californian are among the most impressive in the system.
Enjoy!