Stem cells require signals from a cellular microenvironment known as the niche that regulates identity, location, and division of stem cells. Niche cell identity must be properly specified during development to form a tissue capable of functioning in the adult. Here, we show that the Tbx1 ortholog org1 is expressed in Drosophila testis niche cells in response to Slit and FGF signals. org1 is expressed during niche development and is required to specify niche cell identity. org1 mutants specified fewer niche cells, and those cells showed disruption of niche-specific markers, including loss of the niche adhesion protein Fas3 and reduced hedgehog expression. We found that org1 expression in somatic gonadal precursors is capable of inducing formation of additional niche cells. Disrupted niche identity in org1 mutants resulted in niche assembly and functionality defects. We find the conserved transcription factor islet is expressed in response to org1 and show that islet functions downstream to mediate niche identity and assembly. This work identifies a novel role for org1 in niche establishment.