Stem cell niches are locations where stem cells reside and self-renew. Although studies have shown how niches maintain stem cell fate during tissue homeostasis, less is known about their roles in establishing stem cells. The adult Drosophila midgut is maintained by intestinal stem cells (ISCs); however, how they are established is unknown. Here, we show that an ISC progenitor generates a niche cell via Notch signaling. This niche uses the bone morphogenetic protein 2/4 homolog, decapentaplegic, to allow progenitors to divide in an undifferentiated state and subsequently breaks down and dies, resulting in the specification of ISCs in the adult midgut. Our results demonstrate a paradigm for stem cell-niche biology, where progenitors generate transient niches that determine stem cell fate and may give insights into stem cell specification in other tissues.