No methods for isolating induced alveolar epithelial progenitor cells (AEPCs) from human embryonic stem cells (hESCs) and induced pluripotent stem cells (hiPSCs) have been reported. Based on a study of the stepwise induction of alveolar epithelial cells (AECs), we identified carboxypeptidase M (CPM) as a surface marker of NKX2-1+ “ventralized” anterior foregut endoderm cells (VAFECs) in vitro and in fetal human and murine lungs. Using SFTPC-GFP reporter hPSCs and a 3D coculture system with fetal human lung fibroblasts, we showed that CPM+ cells isolated from VAFECs differentiate into AECs, demonstrating that CPM is a marker of AEPCs. Moreover, 3D coculture differentiation of CPM+ cells formed spheroids with lamellar-body-like structures and an increased expression of surfactant proteins compared with 2D differentiation. Methods to induce and isolate AEPCs using CPM and consequently generate alveolar epithelial spheroids would aid human pulmonary disease modeling and regenerative medicine. Display omitted •Carboxypeptidase M (CPM) is a marker of alveolar epithelial progenitor cells•CPM is useful for isolating “ventralized” anterior foregut endoderm cells (VAFECs)•3D coculture of CPM+ VAFECs enables alveolar differentiation•SFTPC-GFP knockin reporter hPSCs help to detect and isolate SFTPC+ cells No methods for isolating induced alveolar epithelial progenitor cells (AEPCs) from human pluripotent stem cells (hPSCs) have been reported. Gotoh, Ito, and colleagues developed SFTPC-GFP knockin reporter hPSCs and demonstrated that carboxypeptidase M is useful for isolating AEPCs and generating alveolar epithelial cells in a 3D coculture system.