Mesenchymal stem cells (MSCs) are typically defined by their in vitro characteristics, and as a consequence the in vivo identity of MSCs and their niches are poorly understood. To address this issue, we used lineage tracing in a mouse incisor model and identified the neurovascular bundle (NVB) as an MSC niche. We found that NVB sensory nerves secrete Shh protein, which activates Gli1 expression in periarterial cells that contribute to all mesenchymal derivatives. These periarterial cells do not express classical MSC markers used to define MSCs in vitro. In contrast, NG2⁺ pericytes represent an MSC subpopulation derived from Gli1+ cells; they express classical MSC markers and contribute little to homeostasis but are actively involved in injury repair. Likewise, incisor Gli1⁺ cells, but not NG2⁺ cells, exhibit typical MSC characteristics in vitro. Collectively, we demonstrate that MSCs originate from periarterial cells and are regulated by Shh secretion from an NVB.