The life-sustaining air-blood interface of the respiratory system requires the exquisite integration of the epithelial lining with the mesenchymal capillary network, all supported by elastic smooth muscle and rigid cartilage keeping the expandable airways open. These intimate tissue interactions originate in the early embryo, where bidirectional paracrine signaling between the endoderm epithelium and adjacent mesoderm orchestrates lung and trachea development and controls the stereotypical branching morphogenesis. Although much attention has focused on how these interactions impact the differentiation of the respiratory epithelium, relatively less is known about the patterning and differentiation of the mesenchyme. Endothelial cells, smooth muscle cells, and chondrocytes together with other types of mesenchymal cells are essential components of a functional respiratory system, and malformation of these cells can lead to various congenital defects. In this review, we summarize the current understanding of mesenchymal development in the fetal trachea and lung, focusing on recent findings from animal models that have begun to shed light on the poorly understood respiratory mesenchyme lineages.