The lung alveolus is lined with alveolar type 1 (AT1) and type 2 (AT2) epithelial cells. During alveologenesis, increasing demand associated with expanding alveolar numbers is met by proliferating progenitor AT2s (pAT2). Little information exists regarding the identity of this population and their niche microenvironment. We show that during alveologenesis, Hedgehog-responsive PDGFRa(+) progenitors (also known as SCMFs) are a source of secreted trophic molecules that maintain a unique pAT2 population. SCMFs are in turn maintained by TGFβ signaling. Compound inactivation of Alk5 TβR2 in SCMFs reduced their numbers and depleted the pAT2 pool without impacting differentiation of daughter cells. In lungs of preterm infants who died with bronchopulmonary dysplasia, PDGFRa is reduced and the number of proliferative AT2s is diminished, indicating that an evolutionarily conserved mechanism governs pAT2 behavior during alveologenesis. SCMFs are a transient cell population, active only during alveologenesis, making them a unique stage-specific niche mesodermal cell type in mammalian organs. Display omitted •Lung alveolar type 2 progenitors (pAT2s) are heterogeneous during alveologenesis•Blocking TGFβ in SCMF fibroblasts reduces their number and blocks alveologenesis•SCMF signaling regulates proliferation of unique pAT2 population in alveologenesis•An evolutionarily conserved mechanism appears to govern pAT2s in neonatal human lungs Much of the information regarding heterogeneity of alveolar epithelial cells in the lung is from adult mice. Gao et al. analyze the complexity of the alveolar epithelial cell population during alveologenesis, a process interrupted in the pathogenesis of the neonatal chronic lung disease bronchopulmonary dysplasia.