Modifiable hydrogels have revealed tremendous insight into how physical characteristics of cells’ 3D environment drive stem cell lineage specification. However, in native tissues, cells do not passively receive signals from their niche. Instead they actively probe and modify their pericellular space to suit their needs, yet the dynamics of cells’ reciprocal interactions with their pericellular environment when encapsulated within hydrogels remains relatively unexplored. Here, we show that human bone marrow stromal cells (hMSC) encapsulated within hyaluronic acid-based hydrogels modify their surroundings by synthesizing, secreting and arranging proteins pericellularly or by degrading the hydrogel. hMSC’s interactions with this local environment play a role in regulating hMSC fate, with a secreted proteinaceous pericellular matrix associated with adipogenesis, and degradation with osteogenesis. Our observations suggest that hMSC participate in a bi-directional interplay between the properties of their 3D milieu and their own secreted pericellular matrix, and that this combination of interactions drives fate.