Hydrolytically degradable poly(ethylene glycol) (PEG) hydrogels are promising platforms for cell encapsulation and tissue engineering. However, hydrolysis leads to bulk degradation and a decrease in hydrogel mechanical integrity. Despite these challenges, hydrolytically degradable hydrogels have supported macroscopic neotissue growth. The goal of this study was to combine experimental methods with a multiscale mathematical model to analyze hydrogel degradation concomitant with neocartilage growth in PEG hydrogels. Primary bovine chondrocytes were encapsulated at increasing densities (50, 100, and 150 million cells/mL of precursor solution) in a radical-mediated photoclickable hydrogel formed from 8-arm PEG-co-caprolactone end-capped with norbornene and cross-linked with PEG dithiol. Two observations were made in the experimental system: (1) the cell distribution was not uniform and cell clustering was evident, which increased with increasing cell density and (2) a significant decrease in the initial hydrogel compressive modulus was observed with increasing cell concentration. By introducing heterogeneities in the form of cell clusters and spatial variations in the network structure around cells, the mathematical model explained the drop in initial modulus and captured the experimentally observed spatial evolution of ECM and the construct modulus as a function of cell density and culture time. Overall, increasing cell density led to improved ECM formation, ECM connectivity, and overall modulus. This study strongly points to the importance of heterogeneities within a cell-laden hydrogel in retaining mechanical integrity as the construct transitions from hydrogel to neotissue.