Hypertrophic chondrocytes give rise to osteoblasts during skeletal development; however, the process by which these non-mitotic cells make this transition is not well understood. Prior studies have also suggested that skeletal stem and progenitor cells (SSPCs) localize to the surrounding periosteum and serve as a major source of marrow associated SSPCs, osteoblasts, osteocytes, and adipocytes during skeletal development. To further understand the cell transition process by which hypertrophic chondrocytes contribute to osteoblasts or other marrow associated cells, we utilized inducible and constitutive hypertrophic chondrocyte lineage tracing and reporter mouse models (Col10a1CreERT2; Rosa26fs-tdTomato and Col10a1Cre; Rosa26fs-tdTomato) in combination with a PDGFRaH2B-GFP transgenic line, single cell RNA-sequencing, bulk RNA-sequencing, immunofluorescence staining, and cell transplantation assays. Our data demonstrate that hypertrophic chondrocytes undergo a process of dedifferentiation to generate marrow associated SSPCs that serve as a primary source of osteoblasts during skeletal development. These hypertrophic chondrocyte derived SSPCs commit to a CXCL12-abundant reticular (CAR) cell phenotype during skeletal development and demonstrate unique abilities to recruit vasculature and promote bone marrow establishment, while also contributing to the adipogenic lineage.