In April 1917, Albatros received an order from the Idflieg (Inspektion der Fliegertruppen) for an improved version of the D.III. The resulting D.V prototype flew later that month.
The D.V closely resembled the D.III and used the same 127 kW (170 hp) Mercedes D.IIIa engine. The most notable difference was a new, fully elliptical cross-section fuselage which was 32 kg (70 lb) lighter than the partially flat-sided fuselage of the earlier D.I through D.III designs. The new elliptical cross-section required an additional longeron on each side of the fuselage. The vertical fin and tailplane initially remained unchanged from the D.III. The prototype D.V retained the standard rudder of the Johannisthal-built D.III, but production examples used the enlarged rudder featured on D.IIIs built by Ostdeutsche Albatros Werke (OAW). The D.V also featured a larger spinner and ventral fin.
Compared to the D.III, the upper wing of the D.V was repositioned 4.75 inches closer to the fuselage, while the lower wings attached to the fuselage without a fairing. The D.V's wings themselves were almost identical to those of the standard D.III, which had adopted a sesquiplane wing arrangement broadly similar to the French Nieuport 11. The only significant difference between wings of the D.III and D.V was a revised linkage of the aileron cables, which in the new aircraft was contained entirely in the upper wing. Idflieg therefore conducted structural tests on the fuselage, but not the wings, of the D.V.
Early examples of the D.V featured a large headrest, which was usually removed in service because it interfered with the pilot's field of view. The headrest was eventually deleted from production. Aircraft deployed in Palestine used two wing radiators, to cope with the warmer climate.
Idflieg issued production contracts for 200 D.V aircraft in April 1917, followed by additional orders of 400 in May and 300 in July. Initial production of the D.V was exclusively undertaken by the Johannisthal factory, while the Schneidemühl factory produced the D.III through the remainder of 1917.