In the distal lung, alveolar epithelial type I cells (AT1s) comprise the vast majority of alveolar surface area and are uniquely flattened to allow the diffusion of oxygen into the capillaries. This structure along with a quiescent, terminally differentiated phenotype has made AT1s particularly challenging to isolate or maintain in cell culture. As a result, there is a lack of established models for the study of human AT1 biology, and in contrast to alveolar epithelial type II cells (AT2s), little is known about the mechanisms regulating their differentiation. Here we engineer a human in vitro AT1 model system through the directed differentiation of induced pluripotent stem cells (iPSC). We first define the global transcriptomes of primary adult human AT1s, suggesting gene-set benchmarks and pathways, such as Hippo-LATS-YAP/TAZ signaling, that are enriched in these cells. Next, we generate iPSC-derived AT2s (iAT2s) and find that activating nuclear YAP signaling is sufficient to promote a broad transcriptomic shift from AT2 to AT1 gene programs. The resulting cells express a molecular, morphologic, and functional phenotype reminiscent of human AT1 cells, including the capacity to form a flat epithelial barrier which produces characteristic extracellular matrix molecules and secreted ligands. Our results indicate a role for Hippo-LATS-YAP signaling in the differentiation of human AT1s and demonstrate the generation of viable AT1-like cells from iAT2s, providing an in vitro model of human alveolar epithelial differentiation and a potential source of human AT1s that until now have been challenging to viably obtain from patients.