(A) Alveolar epithelial type II (AT2) cells are small cuboidal cells that serve as a partially committed progenitor population. AT2 cells are required for the differentiation and maintenance of tissue-resident alveolar macrophages and are maintained by signals from adjacent mesenchymal cells, including Wnt2⁺ fibroblasts. Alveolar epithelial type I (AT1) cells are large flat cells that can spread over more than one alveolus. Their differentiation and maintenance in the niche also require signals from the adjacent mesenchyme, including Wnt5a⁺ fibroblasts. (B) In response to injury, AT2 cells undergo asymmetric division, with the smaller daughter cell regenerating the AT2 cell and the larger daughter cell differentiating into an AT1 cell. Single-cell RNA sequencing of the lung in murine models of injury, repair, and fibrosis and patients with pulmonary fibrosis identified a population of transitional cells with intermediate phenotypes between AT1 and AT2 cells that accumulate in areas of fibrosis. Transitional cells and profibrotic monocyte-derived alveolar macrophages recruited in response to epithelial injury drive the differentiation of fibroblasts into an intermediate phenotype characterized by expression of Sfrp1 and subsequently a myofibroblast, characterized by Cthrc1. Tregs provide signals that directly or indirectly enhance epithelial repair.