Specialized microenvironments called niches keep stem cells in an undifferentiated and self-renewing state. Dedicated stromal cells form niches by producing a variety of factors that act directly on stem cells. The size and signaling output of niches must be finely tuned to ensure proper tissue homeostasis. Although advances have been made in identifying factors that promote niche cell fate, the mechanisms that restrict niche cell formation during development and limit niche signaling output in adults remain poorly understood. Here, we show that the histone lysine-specific demethylase 1 (Lsd1) regulates the size of the germline stem cell (GSC) niche in Drosophila ovaries. GSC maintenance depends on bone morphogenetic protein (BMP) signals produced by a small cluster of cap cells located at the anterior tip of the germarium. Lsd1 null mutant ovaries carry small germline tumors containing an expanded number of GSC-like cells with round fusomes that display ectopic BMP signal responsiveness away from the normal niche. Clonal analysis and cell type-specific rescue experiments demonstrate that Lsd1 functions within the escort cells (ECs) that reside immediately adjacent to cap cells and prevents them from ectopically producing niche-specific signals. Temporally restricted gene knockdown experiments suggest that Lsd1 functions both during development, to specify EC fate, and in adulthood, to prevent ECs from forming ectopic niches independent of changes in cell fate. Further analysis shows that Lsd1 functions to repress decapentaplegic (dpp) expression in adult germaria. The role of Lsd1 in regulating niche-specific signals may have important implications for understanding how disruption of its mammalian homolog contributes to cancer and metastasis.