Transcriptional condensates are clusters of transcription factors, coactivators, and RNA Pol II associated with high-level gene expression, yet how they assemble and function within the cell remains unclear. Here we show that transcriptional condensates form in a stepwise manner to enable both graded and three-dimensional (3D) gene control in the yeast heat shock response. Molecular dissection revealed a condensate cascade. First, the transcription factor Hsf1 clusters upon partial dissociation from the chaperone Hsp70. Next, the coactivator Mediator partitions following further Hsp70 dissociation and Hsf1 phosphorylation. Finally, Pol II condenses, driving the emergent coalescence of HSR genes. Molecular analysis of a series of Hsf1 mutants revealed graded, rather than switch-like, transcriptional activity. Separation-of-function mutants showed that condensate formation can be decoupled from gene activation. Instead, fully assembled HSR condensates promote adaptive 3D genome reconfiguration, suggesting a role of transcriptional condensates beyond gene activation.