Interactions between niche cells and stem cells are vital for proper control over stem cell self-renewal and differentiation. However, there are few tissues where the initial establishment of a niche has been studied. The Drosophila testis houses two stem cell populations, which each lie adjacent to somatic niche cells. Although these niche cells sustain spermatogenesis throughout life, it is not understood how their fate is established. Here, we show that Notch signaling is necessary to specify niche cell fate in the developing gonad. Surprisingly, our results indicate that adjacent endoderm is the source of the Notch-activating ligand Delta. We also find that niche cell specification occurs earlier than anticipated, well before the expression of extant markers for niche cell fate. This work further suggests that endoderm plays a dual role in germline development. The endoderm assists both in delivering germ cells to the somatic gonadal mesoderm, and in specifying the niche where these cells will subsequently develop as stem cells. Because in mammals primordial germ cells also track through endoderm on their way to the genital ridge, our work raises the possibility that conserved mechanisms are employed to regulate germline niche formation.