Background Peroxisome proliferator-activated receptor (PPAR)-γ is a nuclear hormone receptor that regulates gene expression, cell proliferation and differentiation. We previously described airway epithelial cell PPARγ deficient mice that develop airspace enlargement with decreased tissue resistance and increased lung volumes. We sought to understand the impact of airspace enlargement in conditionally targeted mice upon the physio-mechanical properties of the lung. Methods We measured elastic recoil and its determinants, including tissue structure and surface forces. We measured alveolar number using radial alveolar counts, and airspace sizes and their distribution using computer-assisted morphometry. Results Air vs. saline-filled pressure volume profiles demonstrated loss of lung elastic recoil in targeted mice that was contributed by both tissue components and surface tension, but was proportional to lung volume. There were no significant differences in surfactant quantity/function nor in elastin and collagen content between targeted animals and littermate controls. Importantly, radial alveolar counts were significantly reduced in the targeted animals and at 8 weeks of age there were 18% fewer alveoli with 32% more alveolar ducts. Additionally, the alveolar ducts were 19% larger in the targeted animals. Conclusions Our data suggest that the functional abnormalities, including loss of recoil are secondary to altered force transmission due to differences in the structure of alveolar ducts, rather than changes in surfactant function or elastin or collagen content. These data further define the nature of abnormal lung maturation in the absence of airway epithelial cell PPARγ and identify a putative genetic determinant of dysanapsis, which may serve as a precursor to chronic lung disease.