In the last decade there has been a rapid expansion in clinical trials using mesenchymal stromal cells (MSCs) from a variety of tissues. However, despite similarities in morphology, immunophenotype, and differentiation behavior in vitro, MSCs sourced from distinct tissues do not necessarily have equivalent biological properties. We performed a genome-wide methylation, transcription, and in vivo evaluation of MSCs from human bone marrow (BM), white adipose tissue, umbilical cord, and skin cultured in humanized media. Surprisingly, only BM-derived MSCs spontaneously formed a BM cavity through a vascularized cartilage intermediate in vivo that was progressively replaced by hematopoietic tissue and bone. Only BM-derived MSCs exhibited a chondrogenic transcriptional program with hypomethylation and increased expression of RUNX3, RUNX2, BGLAP, MMP13, and ITGA10 consistent with a latent and primed skeletal developmental potential. The humanized MSC–derived microenvironment permitted homing and maintenance of long-term murine SLAM⁺ hematopoietic stem cells (HSCs), as well as human CD34⁺/CD38⁻/CD90⁺/CD45RA⁺ HSCs after cord blood transplantation. These studies underscore the profound differences in developmental potential between MSC sources independent of donor age, with implications for their clinical use. We also demonstrate a tractable human niche model for studying homing and engraftment of human hematopoietic cells in normal and neoplastic states.