Most vertebrate organs are composed of epithelium surrounded by support and stromal tissues formed from mesenchyme cells, which are not generally thought to form organized progenitor pools. Here we use clonal cell labeling with multicolor reporters to characterize individual mesenchymal progenitors in the developing mouse lung. We observe a diversity of mesenchymal progenitor populations with different locations, movements, and lineage boundaries. Airway smooth muscle (ASM) progenitors map exclusively to mesenchyme ahead of budding airways. Progenitors recruited from these tip pools differentiate into ASM around airway stalks; flanking stalk mesenchyme can be induced to form an ASM niche by a lateral bud or by an airway tip plus focal Wnt signal. Thus, mesenchymal progenitors can be organized into localized and carefully controlled domains that rival epithelial progenitor niches in regulatory sophistication.