Damage to alveoli, the gas-exchanging region of the lungs, is a component of many chronic and acute lung diseases. In addition, insufficient generation of alveoli results in bronchopulmonary dysplasia, a disease of prematurity. Therefore visualising the process of alveolar development (alveologenesis) is critical for our understanding of lung homeostasis and for the development of treatments to repair and regenerate lung tissue. Using long-term, time-lapse imaging of precision-cut lung slices, we show alveologenesis for the first time. We reveal that during this process, epithelial cells are highly mobile and we identify specific cell behaviours that contribute to alveologenesis: cell clustering, hollowing and cell extension. Using the cytoskeleton inhibitors blebbistatin and cytochalasin D, we showed that cell migration is a key driver of alveologenesis. This study reveals important novel information about lung biology and provides a new system in which to manipulate alveologenesis genetically and pharmacologically.