Many acute and chronic diseases affect the distal lung alveoli. Alveolar epithelial cell (AEC) lines are needed to better model these diseases. We used de-identified human remnant transplant lungs to develop a method to establish AEC lines. The lines grow well in 2-dimensional (2D) culture as epithelial monolayers expressing lung progenitor markers. In 3-dimensional (3D) culture with fibroblasts, Matrigel, and specific media conditions, the cells form alveolar-like organoids expressing mature AEC markers including aquaporin 5 (AQP5), G-protein-coupled receptor class C group 5 member A (GPRC5A), and surface marker HTII280. Single-cell RNA sequencing of an AEC line in 2D versus 3D culture revealed increased cellular heterogeneity and induction of cytokine and lipoprotein signaling in 3D organoids. Our approach yields lung progenitor lines that retain the ability to differentiate along the alveolar cell lineage despite long-term expansion and provides a valuable system to model and study the distal lung in vitro. Display omitted •Human AT2 cells grown in Y-27632 medium are immortalized by SV40 Large T antigen•Immortalized AT2 cells are SOX9+/SOX2+ in the absence of mature alveolar markers•Immortalized AT2 cells form NKX2-1+/AQP5+/GPRC5A+ organoids in 3D culture•Specific 3D culture conditions induce AT2 marker HTII280 expression in organoids Cell biology; Stem cells research; Developmental biology; Transcriptomics