Recreating the 3D cyst-like architecture of the alveolar epithelium in vitro has been challenging to achieve in a controlled fashion with primary lung epithelial cells. Here, we demonstrate model alveoli formed within a tunable synthetic biomaterial platform using photodegradable microspheres as templates to create physiologically relevant, cyst structures. Poly(ethylene glycol) (PEG)-based hydrogels were polymerized in suspension to form microspheres on the order of 120 μm in diameter. The gel chemistry was designed to allow erosion of the microspheres with cytocompatible light doses (≤15 min exposure to 10 mW cm-2 of 365 nm light) via cleavage of a photolabile nitrobenzyl ether crosslinker. Epithelial cells were incubated with intact microspheres, modified with adhesive peptide sequences to facilitate cellular attachment to and proliferation on the surface. A tumor-derived alveolar epithelial cell line, A549, completely covered the microspheres after only 24 hours, whereas primary mouse alveolar epithelial type II (ATII) cells took ∼3 days. The cell-laden microsphere structures were embedded within a second hydrogel formulation at user defined densities; the microsphere templates were subsequently removed with light to render hollow epithelial cysts that were cultured for an additional 6 days. The resulting primary cysts stained positive for cell-cell junction proteins (β-catenin and ZO-1), indicating the formation of a functional epithelial layer. Typically, primary ATII cells differentiated in culture to the alveolar epithelial type I (ATI) phenotype; however, each cyst contained ∼1-5 cells that stained positive for an ATII marker (surfactant protein C), which is consistent with ATII cell numbers in native mouse alveoli. This biomaterial-templated alveoli culture system should be useful for future experiments to study lung development and disease progression, and is ideally suited for co-culture experiments where pulmonary fibroblasts or endothelial cells could be presented in the hydrogel surrounding the epithelial cysts.