Adipose tissue is used extensively in reconstructive and regenerative therapies, but transplanted fat often undergoes inflammation and cell death, requiring further revision surgery. We report that functional human adipose tissue can be generated from mesenchymal progenitor cells in-vivo, providing an alternative approach to its therapeutic use. We leveraged previous findings that progenitor cells within the vasculature of human adipose tissue robustly proliferate in 3-dimensional culture under proangiogenic conditions. Implantation of these progenitor cells into immunocompromised mice results in differentiation towards non-adipocyte fates, incapable of generating a distinct tissue structure. However, priming of these progenitor cells in-vitro towards adipogenic differentiation results in formation of functional adipose tissue in-vivo. Mechanistically, priming induces the expression of genes encoding specific extracellular matrix and remodeling proteins, and induces extensive vascularization by host blood vessels. In comparison, grafts from adipose tissue obtained by liposuction undergo poor vascularization, adipocyte death, cyst formation, calcification and inefficient adiponectin secretion. Thus, primed mesenchymal adipose tissue progenitors reveal mechanisms of human adipose tissue development, and have potential to improve outcomes in reconstructive and regenerative medicine.