Tissue engineering is a promising approach to repair critical-size defects in bone. Damage to vasculature at the defect site can create a lower O2 environment compared with healthy bone. Local O2 levels influence stem cell behavior, as O2 is not only a nutrient, but also a signaling molecule. The hypoxia-inducible factor-1 (HIF-1) is a transcription factor that regulates a wide range of O2-related genes and its contribution in bone repair/formation is an important area that can be exploited. In this study, we examined the effect of low O2 environments (1% and 2% O2) on the osteogenic differentiation of adipose-derived stem cells in both two-dimensional (2-D) and three-dimensional (3-D) culture systems. To determine the role of HIF-1 in the differentiation process, an inhibitor was used to block the HIF-1 activity. The samples were examined for osteogenesis markers as measured by quantification of the alkaline phosphatase (ALP) activity, mineral deposition, and expression of osteonectin (ON) and osteopontin (OPN). Results show a downregulation of the osteogenic markers (ALP activity, mineralization, ON, OPN) in both 1% and 2% O2 when compared to 20% O2 in both 2-D and 3-D culture. Vascular endothelial growth factor secretion over 28 days was significantly higher in low O2 environments and HIF-1 inhibition reduced this effect. The inhibition of the HIF-1 activity did not have a significant impact on the expression of the osteogenic markers, suggesting HIF-1-independent inhibition of osteogenic differentiation in hypoxic conditions.