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.