The future of tissue engineering requires development of intelligent biomaterials using nanoparticles. Magnetic nanoparticles (MNPs) have several applications in biology and medicine; one example is Food and Drug Administration (FDA)-approved contrast agents in magnetic resonance imaging. Recently, MNPs have been encapsulated within cell-encapsulating hydrogels to create novel nanobiomaterials (i.e., M-gels), which can be manipulated and assembled in magnetic fields. The M-gels can be used as building blocks for bottom-up tissue engineering to create 3D tissue constructs. For tissue engineering applications of M-gels, it is essential to study the release of encapsulated MNPs from the hydrogel polymer network and the effect of MNPs on hydrogel properties, including mechanical characteristics, porosity, swelling behavior, and cellular response (e.g., viability, growth). Therefore, we evaluated the release of MNPs from photocrosslinkable gelatin methacrylate hydrogels as the polymer network undergoes biodegradation using inductively coupled plasma atomic emission spectroscopy. MNP release correlated linearly with hydrogel biodegradation rate with correlation factors (Pearson product moment correlation coefficient) of 0.96 ± 0.03 and 0.99 ± 0.01 for MNP concentrations of 1% and 5%, respectively. We also evaluated the effect of MNPs on hydrogel mechanical properties, porosity, and swelling behavior, as well as cell viability and growth in MNP-encapsulating hydrogels. Fibroblasts encapsulated with MNPs in hydrogels remained viable (>80% at t = 144 h) and formed microtissue constructs in culture (t = 144 h). These results indicated that MNP-encapsulating hydrogels show promise as intelligent nanobiomaterials, with great potential to impact broad areas of bioengineering, including tissue engineering, regenerative medicine, and pharmaceutical applications.